CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
ever, most lenders still deem it necessary to have the intercreditor agreement in place for the fol- lowing reasons. • With the assumption that an offshore mort- gage is in place, an intercreditor agreement customarily regulates matters other than joint security, such as co-operation on defaults and enforcement actions, notifications of defaults, cure/purchase rights, etc. Therefore, perfection of the property mortgage does not mean that the intercreditor agreement is no longer relevant. • In case of enforcement of the combined financing in the current market, the buyer is likely to be onshore and purchasing the wholly foreign-owned entity (WFOE). There- fore, the equity pledge over the onshore bor- rower is an important security for the offshore lenders, and enforcement arrangements between onshore and offshore lenders remain critical in terms of protecting offshore lenders’ interests. Standstill All the lenders must refrain from taking any action to accelerate the loan or otherwise enforce any part of the security package within 90 days of the occurrence of an event of default (and, if agreed, for a further 90 days), and must do their best to reach a consensus on how to enforce the security package (either an offshore sale of shares or an onshore sale of real properties and other operational assets). Sharing of Security Proceeds Onshore and offshore lenders agree to share the security enforcement proceeds on a pro rata basis. This is not easily achievable due to PRC foreign exchange control rules, including that:
• PRC lenders are not allowed to voluntarily waive part of their entitlement to the out- standing loan amounts or security proceeds unless they have special approval from the banking regulator; and • PRC borrowers or security providers may not provide upstreaming security to offshore lenders unless such security is registered with SAFE, which is a merit review, and meets specific conditions that are not easy to sat- isfy. Call Option Onshore and offshore lenders will grant each other a call option to purchase the entire por- tion of outstanding loans held by another group of lenders when both sides cannot reach a con- sensus on how to enforce the security package. 4.2 Bank/Bond Deals The approach to bank/bond deals is similar to that detailed in 4.1 Typical Elements . 4.3 Role of Hedge Counterparties The role of hedge counterparties is similar to the roles described in standard LMA International Council on Archives documents. The hedging arrangements may be put in place prior to or post signing. Typically, the hedging liabilities for the senior debt and the senior debtor will rank pari passu, and the hedging counterparties will benefit from the same guarantees and security package of the senior debt. In sponsor financing, the borrower will also request to select, at its discretion, a hedge coun- terparty that is not a syndication lender. How- ever, the lender will usually ask for a first right to offer and a last right to match the hedging terms, thereby limiting the possibility for a third-party creditor to come in and share the guarantees and securities.
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