Viewpoint... Cross-border financing observation-the new rules on foreign debt take effect tomorrow, where are the changes? (I).

Published:

2023-02-10

On January 5, 2023, the National Development and Reform Commission issued Order No. 56, officially promulgating the "Administrative Measures for the Examination and Registration of Medium and Long-term Foreign Debt of Enterprises" (hereinafter referred to as the "Measures"). The "Measures" will come into effect on February 10, 2023. Since its implementation in 2015, the "Notice of the National Development and Reform Commission on Promoting the Reform of the Registration System for the Registration of Foreign Debt Issued by Enterprises" (hereinafter referred to as "Document No. 2044") will be invalidated and abolished at the same time, marking a new era in the supervision of corporate foreign debt issuance. The Measures have six chapters and 37 articles. Compared with Document No. 2044, it reflects the policy guidance of improving the management system, improving the quality and level of management, and effectively preventing foreign debt risks, improving the management of overseas bond issuance, and strengthening monitoring and risk early warning. While strongly supporting enterprises to use global resource elements to expand domestic and foreign business, it has also played a positive role in optimizing the maturity structure of full-caliber foreign debt and effectively preventing foreign debt risks. This paper compares some of the highlights of the Measures with Document 2044 and attempts to make a brief analysis. 1. "notice" becomes "method" The nature of document No. 2044 is a "notice" and a normative document, while the National Development and Reform Commission clearly defined the "measures" as departmental regulations in answering reporters' questions on the "measures for the examination and Registration of medium-and long-term Foreign debts of Enterprises," and its effectiveness has been improved. 2. "record registration" adjusted to "audit registration" Document No. 2044 adopts the "record registration system management" for the issuance of foreign debt of enterprises, while the "measures" implement the "examination and registration management" for the foreign debt of enterprises that meet the conditions ". The difference between the term and the legal nature is different: "record registration" is not an administrative license, but only an act of administrative organ registration for reference; while the "examination and registration" in the "measures" is an administrative license (the annex to the notice of the General Office of the State Council on the comprehensive implementation of the list of administrative license items issued by the State Council No. 2 [2022] clearly lists "examination and approval of medium-and long-term foreign debt borrowing by enterprises" as an administrative license items). Nevertheless, both the "filing" of document No. 2044 and the "examination and registration" of the "measures" have set conditions for substantive examination. The audit criteria for "examination and registration" in the measures have become stricter, coupled with the impact of the rising cost of overseas financing caused by the continuous interest rate hike of the Federal Reserve, on August 26, 2022, after the National Development and Reform Commission issued the measures for the examination and Registration of medium-and long-term Foreign debts of Enterprises (draft for soliciting opinions), the number of overseas debt issuance and the scale of financing decreased significantly in the second half of 2022. 3. audit principles put more emphasis on "risk prevention" Document No. 2044 proposes to implement scale control of foreign debt issued by enterprises in accordance with the principle of "controlling total amount, optimizing structure, and serving entities", strengthen supervision during and after the event, and effectively prevent risks; the "Measures" increase the principle of corporate foreign debt review and registration management to "Control total amount, optimize structure, serve entities, and prevent risks", and delete the expression "expand the scale of corporate foreign debt" in Document 2044. In 2022, a total of 43 entities and $57.6 billion of bonds defaulted, up 95 per cent and 61 per cent respectively from the same period last year; 97 per cent of these were material defaults, 2.5 per cent were technical defaults and 98 per cent were concentrated in the real estate sector. With the country's vigorous rectification of the property market, real estate enterprises limited financing channels, superimposed on the epidemic caused by the property market downturn, the industry is facing severe debt pressure. Rongchuang, Greenland, Shimao, Baolong, Yuzhou, Rongxin, Zhengrong, Xuhui, Zhongliang, Fuli, Longguang, Aoyuan, Hejing Taifu, Jingrui, Hongyang, Sino-Ocean Capital, Jiayuan, Jinke and many other leading real estate enterprises in the US dollar debt default, have taken debt extensions, exchange offers and other ways to save themselves. It is foreseeable that the principle of "risk prevention" will become an important guiding principle for the examination and registration of foreign debt in the future. At present, the main issuers of foreign bonds are concentrated in financial institutions, urban investment and real estate enterprises, unlike real estate enterprises, so far, the credit situation of urban investment dollar bonds is still good, and showing a trend of regional differentiation. In 2022, Zhejiang, Jiangsu and Shandong, the three eastern coastal developed provinces, are the three major urban investment overseas bond issuing provinces, accounting for about 16%, 15% and 14% respectively, accounting for more than 45% in total. The net financing amount has reached more than 100 billion yuan, and the overseas bond issuance market shows a certain concentration trend; while the regions with the largest net repayment scale are Gansu, Guizhou and Yunnan. Substantial change in 4. review conditions: bonds can also be issued in the event of a default. According to Article 3 of Document No. 2044, the issuance of foreign debt by an enterprise shall meet the following basic conditions: a good credit record and no default on the bonds or other debts issued. It has good corporate governance and foreign debt risk prevention and control mechanism. Good credit standing and strong solvency. The "Measures" added the requirement of "having a reasonable demand for foreign debt funds", which reflects the guiding principle that corporate foreign debt should focus on the main business and service entities; deleted the requirement that "issued bonds or other debts are not in default". "With strong solvency" was changed to "with solvency", giving enterprises more room to borrow foreign debt to save themselves, it reflects the important positioning of the National Development and Reform Commission that "corporate borrowing of foreign debt, especially medium and long-term foreign debt, is an important part of my country's effective use of foreign capital and expansion of two-way opening up. However, it is foreseeable that for companies that have defaulted, the National Development and Reform Commission will conduct a more stringent review of the company's creditworthiness and use of funds. In addition, the "Measures" also added that "the enterprise and its controlling shareholders, and actual controllers have not committed criminal crimes of corruption, bribery, embezzlement of property, misappropriation of property, or disrupting the order of the socialist market economy in the past three years, or are suspected of crimes or major violations of laws According to the requirements of" violations ", the follow-up due diligence of foreign debt issuance intermediaries should increase the relevant scope, relevant sections shall be added to relevant transaction documents and legal documents. 5. scientific delineation of the scope of management, reduce regulatory blind spots 1, clear "indirect borrowing of foreign debt abroad" audit registration. The Measures clarify that these Measures apply to domestic enterprises' indirect borrowing of foreign debt abroad, and also clarify the definition of indirect debt issuance: domestic enterprises' indirect borrowing of foreign debt abroad refers to enterprises whose main business activities are in the country, in the name of enterprises registered overseas, based on the equity, assets, income or other similar rights and interests of domestic enterprises, issuing bonds or borrowing commercial loans abroad. It can be seen that the Measures adopt a more general expression for the supervision of the structure of "indirect bond issuance", which not only brings the indirect bond issuance of red chips and VIE structure into the supervision, but also expands the scope of indirect borrowing of foreign debt that needs to be reviewed and registered to a certain extent, and the transaction structure that meets the characteristics of "indirect bond issuance" is included in the supervision. As for the understanding of "the main business activities are in China" and "based on the equity, assets, income or other similar rights and interests of domestic enterprises", it is necessary to further explain through the government service platform of the national development and Reform Commission to issue the "work guide" and frequently asked questions matching the "management measures". We will also pay close attention to it. 2. Clarify the audit and registration of the issuance structure of overseas SPV and other subsidiaries as issuers. In practice, it is very common for domestic parent companies to set up SPV and other subsidiaries abroad as the issuance structure of overseas bond issuers, and there is no doubt about the filing and examination of this structure. However, the Measures further clarify this: Article 2 of the Measures defines the foreign debts that need to be examined and registered as debt instruments of more than one year borrowed by "domestic enterprises and their controlled overseas enterprises or branches, and the definition of" control ":" the control referred to in these measures refers to the direct or indirect ownership of more than half of the voting rights of the enterprise, or although it does not have more than half of the voting rights, but can control the operation, finance, personnel, technology and other important matters of the enterprise." 6. Application Procedure Optimization 1. Application subject optimization: no longer distinguish between group headquarters and local enterprises According to Article 11 of the Measures, the "headquarters of domestic holding enterprises" shall apply to the examination and registration authority. The distinction between group headquarters and local enterprises is no longer made in accordance with article 2044. To a certain extent, the new regulations are conducive to the unified management of enterprise groups and promote the further optimization of the foreign debt management of the NDRC. 2. The audit time limit was extended from 7 working days to 3 months The "Measures" extend the time limit for issuing a registration certificate from 7 working days after acceptance to 3 months from the date of acceptance (the time taken to complete the review and registration materials is not counted in the time limit for review and registration). It should be noted that at present, there are two time points for foreign debt registration of safe. First, as required on page 8 of the operational guidelines for the administration of foreign debt registration, foreign debt registration procedures shall be handled at the local foreign exchange bureau within 15 working days after the signing of the foreign debt contract; second, as stipulated in Article 10 of the notice of the people's Bank of China on matters related to macro Prudential Management of full caliber cross-border financing, the enterprise shall, after the signing of the cross-border financing contract but no later than 3 working days before the withdrawal, file the signing of the cross-border financing with the capital project information system of the State Administration of Foreign Exchange. Under the condition that the "Measures" clearly require the "Audit Registration Certificate" for foreign exchange registration, the three-month audit period may have problems with the handling of SAFE procedures. The timing of the issuance is worthy of the attention of relevant entities, and the timetable should be planned in advance. 7. strengthens the management of the use of foreign debt funds, and makes the use of foreign debt funds more flexible. The new regulations put forward a positive orientation and negative list of the use of foreign debt, and focus on guiding enterprises to use foreign debt funds from both positive and negative aspects. As an answer to the old regulation, item 47 points out that the use of foreign debt funds should meet the following conditions:(1) do not violate China's laws and regulations;(2) do not threaten or harm China's national interests and economic security;(3) do not violate China's macroeconomic control objectives;(4) do not violate China's relevant development plans and industrial policies;(5) shall not be used to make up for losses and non-productive expenditures;(6) Except for banking financial enterprises, they may not lend to others ". In this regard, the "Notice" has made many adjustments:(1) For the requirement that financial enterprises other than banks are not allowed to lend to others, if "the relevant information has been stated in the application materials for foreign debt review and registration and approval", they can lend. However, the extent to which enterprises need to explain whether such lending constitutes a major change in the use of raised funds and triggers the change application obligation stipulated in Item (II) of Article 18 of the measures still needs to be explored in practice;(2) delete the requirement of "not to be used to make up for losses and non-productive expenditures" and add the requirement of "not to be used for speculation, speculation and other acts". On the whole, the new regulations not only allow to make up for losses, the scope of "speculation and speculation" is also smaller than that of "non-productive expenditure", and the use of enterprise funds is more flexible;(3) the provision of "no new hidden debts of local governments" is added, once again, it is clearly stated that the state has repeatedly emphasized in many documents, such as Guofa [2014] No. 43, Guobanfa [2015] No. 40, FGFFEI [2018] No. 706, FGFEI [2019] No. 666, FGFEI [2018] No. 27, and FBC [2021] No. 15, who borrows and pays back the debts of state-owned enterprises, the local finance is not guaranteed, and the local government is only limited. Guiding Principles of Responsibility. Compared with document No. 2044, on the basis of repeatedly emphasizing the encouragement of foreign debt funds to flow to national key strategies and key projects, the new regulations emphasize that "enterprises can make independent decisions to apply foreign debt funds at home and abroad according to their own credit situation and actual needs." it defines the basic attitude of regulators on the free use of foreign debt funds within the legal scope, which can be mutually confirmed with the content of the new regulations mentioned in this article to expand the scope of capital lending. The 8. clearly states that foreign exchange registration requires a Certificate of Audit and Registration. Document No. 2044 only requires enterprises to go through relevant procedures such as inflow and outflow of foreign debt according to regulations on the basis of the filing registration certificate, but does not clearly specify the registration of foreign debt. Article 17 of the Measures specifies that foreign exchange registration must be handled by means of the Examination and Registration Certificate: enterprises shall go through relevant procedures such as foreign exchange registration, account opening, fund receipt and exchange, and fund use according to regulations on the basis of the Examination and Registration Certificate. For enterprises that fall within the scope of management of these Measures but have not obtained the "Examination and Registration Certificate", the relevant departments will not handle the relevant procedures, and financial institutions will not handle the relevant business. 9. takes information disclosure as the core and compacts the main responsibility of all parties. Document No. 2044 stipulates that "within 10 working days after the end of each issue, the issuance information shall be submitted to the National Development and Reform Commission", and the "Measures" greatly enriched the requirements for information disclosure: First of all, the time and content of the post-event submission are clarified. The enterprise shall, within 10 working days after borrowing each foreign debt, submit the information of borrowing foreign debt to the examination and registration authority through the network system, including the main business indicators of the enterprise and the situation of foreign debt borrowing, etc.; within 10 working days after the expiration of the validity period of the examination and registration certificate, the corresponding foreign debt borrowing situation shall be submitted. The term "after borrowing foreign debt" refers to the exercise of the right of the enterprise to withdraw foreign debt funds (the completion of the delivery of foreign bonds or each withdrawal of commercial loans); Secondly, a reporting system for major events has been added, and for major situations that may affect the normal performance of debts, such as domestic and foreign debt repayment risks or major asset restructuring, enterprises should promptly report relevant information and take risk isolation measures to prevent spillover and cross-default risks of domestic bond default risks; Third, a new periodic reporting system has been added. Enterprises should report to the examination and registration authority through the network system the use of foreign debt funds, the payment of principal and interest, the planned arrangement, and the main business indicators within five working days before the end of January and July each year; Fourth, the obligation of overseas investigation and reporting has been increased. If enterprises or relevant intermediary agencies need to cooperate with overseas regulatory agencies for inspection or investigation due to borrowing foreign debts, and involve national security or public interests, they should report to the relevant domestic authorities in advance. 10. Enhance Change Regulation According to the "Measures", after the completion of the foreign debt review and registration, if the currency of the foreign debt to be borrowed or the type of debt instrument changes, the use of the raised funds changes significantly, or other circumstances that require major adjustments to the relevant content of the "Review and Registration Certificate" occur, the enterprise shall apply to the review and registration authority for changes before the relevant circumstances occur; and Document 2044 only stipulates, "When there is a large difference between the actual situation of the issuance of foreign debt by an enterprise and the registration of the record, it shall be explained when the information is submitted". 11. Other changes in the Measures In addition to the above changes, the Measures have also made many changes to the external debt audit and registration process, such as the addition of a mechanism for the completion of audit materials, the parallel submission of network systems and paper materials, the refinement of the content of debt instruments, the enhancement of the responsibilities of enterprises and intermediaries, etc., which we will discuss in subsequent articles. Conclusion: winter and spring, looking ahead to the bond market in 2023 In 2022, a total of about $104.8 billion million of Chinese dollar-denominated debt will be issued, down 57% from 2021; Bloomberg Chinese Dollar-denominated Debt Investment Grade Index, Bloomberg Chinese Dollar-denominated Debt High Yield Index

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