CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
• if the issuer is separated from its parent group, a guaranteed provided by the parent group. 3.5 Private Placements/Loan Notes The structure for private placements/loan notes is almost identical to that outlined in 3.4 Bonds/ High-Yield Bonds . 3.6 Asset-Based Financing In the acquisition finance area, direct purchase of the assets may not be a preferred choice mainly due to tax considerations. As mentioned, PE sponsors typically carry out acquisitions by way of equity rather than asset transactions. There- fore, in the PRC market, asset-based financing deals are not frequently seen in industries other than real estate. For real estate loans, lenders usually adopt similar secured lending structures to those discussed in 3.1 Senior Loans , with the typical security package comprising the follow- ing, with the purpose of ring-fencing the asset values and the future cash flows of the borrower: • a mortgage over the property; • a pledge over the account receivable if the property is leased; and • an assignment of rights under the material contracts, including insurance policies and leases (to the extent that such rights are not subject to the receivable pledge above). In asset-based lending, considering the assets will be the core repayment sources (together with the cash flow generated during the loan tenor), this structure is less attractive to inter- national banks if there is an offshore tranche, because of the structural subordination issue. On the contrary, some PRC banks will consider extending the offshore tranche loans through their free trade zone (FTZ) branches. As the FTZ
branches are PRC entities, second lien mort- gages created in favour of those bank branches will not constitute outward security requiring SAFE registration. As such, PRC banks with FTZ branches are key participants in this niche market.
4. Intercreditor Agreements 4.1 Typical Elements
A typical intercreditor agreement under an off- shore/onshore dual tranche transaction includes the following arrangements. Priority of Payments As discussed in 3.1 Senior Loans , the offshore loan is structurally subordinated to the onshore loan, and the intercreditor agreement will specify the types of payments that the onshore lenders can receive pursuant to the onshore finance doc- uments. While the scope of such types of pay- ments is deal-specific and will be negotiated, the market consensus is that only enforcement pro- ceeds recovered by the onshore lenders should be subject to payment subordination, while other regular payments under the finance docu- ments (including payment of interest or default interest, repayment or prepayment of onshore loans, and payment of indemnities, costs and expenses) should be permitted as long as no default has occurred and/or is continuing. As a new development in the market, there is an increasing trend of offshore lenders being able to secure a second lien mortgage even though it is still not prevailing market practice in sponsor-financed transactions. In turn, bor- rowers will argue that, given the new security, an intercreditor agreement is no longer required, as the typical intercreditor agreement is intended to solve the structural subordination issue. How-
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