Asia Market Watch: China Banking Regulator Permits LBO Financing

Posted on January 6, 2009 at 9:01 PM

China’s banking regulator has issued new rules which open the door for Chinese banks to engage in onshore acquisition finance.  The Guidelines on Risk Management of Acquisition Loans of Commercial Banks were issued by the China Banking Regulatory Commission (CBRC) on December 6, 2008.  The State Council hopes that the Guidelines will pump more credit support into key projects, agriculture, rural areas, small-and medium-sized enterprises, technical innovation and enterprise M&As.

LBO-style deals have been consummated as early as 2004, and White &Case and Paul Hastings both have played leading roles on two major deals in 2006.  But the role (and experience) of domestic banks was limited and the secured lending laws were not so secure.  We’ll be sure to delve into the details in a latter post.

The Guidelines allow “strong” commercial banks to lend to companies for the purpose of paying M&A transaction fees.  Exposures, leverage ratio and tenor of acquisition loans are all regulated.  China’s “Big Four” state-owned banks, as well as China Merchants Bank, CITIC Bank and Industrial Bank Co will be expected to meet the criteria for lending.

Large state-owned enterprises will likely be the first to benefit.  China Construction Bank (CCB), one of the Big Four banks, is rumored to be in talks to finance M&A for Baosteel, China’s largest steelmaker.  Meanwhile, Bank of Communications is in negotiations with companies specializing in steel manufacturing and shipbuilding.

Following the passage of the Guidelines, the Shanghai United Assets and Equity Exchange (SUAEE) on Christmas Day agreed to offer credit of RMB10 billion (US$1.46 billion) for M&A with the help of the Shanghai branch of the Industrial and Commercial Bank of China (ICBC) and the Bank of Shanghai.  The Shanghai United Assets and Equity Exchange is the city's mandatory venue for the transfer of state-owned assets.

Under terms of agreement, SUAEE will be responsible for recommending companies and projects, excluding those involving real estate, to ICBC and Bank of Shanghai.  The banks in turn will grant loans if the deals meet their qualifications.  The business is expected to be rolled out from the first quarter of 2009, with a leverage ratio of about 50 percent.

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