Rule change lets Chinese firms guarantee offshore debt
Companies will be allowed to guarantee offshore debt without prior approval under new rules
The State Administration of Foreign Exchange has published new rules allowing firms to guarantee their offshore debt without prior regulatory approval.
The liberalisation introduces the possibility of foreign investors making claims on mainland firms' domestic assets in the event of a debt default.
Foreign investors should feel more comfortable lending to mainland firms, which will also find it less costly to issue debt in offshore loan and bond markets.
"Some people may even think this could be game-changing," said David Yim, the head of north Asia debt capital markets at RBS. "But as with most [mainland] regulations, you need to understand the underlying rationale."
The liberalisation is subject to significant restrictions. If the guaranteed debt is a bond, then the money must be invested in a project approved by the National Development and Reform Commission. This is taken to mean offshore acquisitions, as they are the type of "project" that the agency approves.
The new rules will initially benefit state-owned enterprises borrowing offshore to finance cross-border acquisitions.
"The purpose is to facilitate firms with offshore funding needs, especially SOEs, as part of the government agenda to encourages SOEs to make outbound investments," said Ying Wang, a director of corporates at Fitch Ratings.
SAFE bars the repatriation of funds raised from guaranteed offshore debt through the usual channels, such as intragroup equity investments or loans. However, it is less restrictive on how the money is used.
Mainland property developers are the heaviest issuers of cross-border bonds. As they need to bring the funds back for their domestic projects, the rule change would not benefit them, Wang said.
Mainland firms are increasingly heavy users of international loan markets to fund cross-border acquisitions, so this liberalisation is likely to prove significant to big institutional lenders.
The conceptual shift is also important. Mainland capital controls previously restricted firms from pledging domestic assets against their offshore debt.
This meant foreign investors were structurally subordinate to their domestic counterparts in the event of a default, as they would be the first to settle any claims.
Mainland firms have worked around the guarantee issue by using keepwell agreements, liquidity support covenants, deeds of equity agreement and standby letters of credit.
The new rules are effective from June 1.