中国公司境外发债研究系列 -- 外债备案制简介
Understanding Foreign Debt Registration Rules in China
On March 1, 2017, the Shenzhen Development and Reform Commission (“Shenzhen NDRC”) issued a Notice on Surveying the 2017 Quota Requirement of Mid- and Long-term Foreign Debt in Shenzhen (深圳市发展和改革委员会关于开展2017年度中长期外债额度需求摸底有关工作的通知) (the “Shenzhen NDRC 2017 Notice”). Under the Shenzhen NDRC 2017 Notice and another notice issued by Shenzhen NDRC in June 2016, Shenzhen NDRC will give priority to foreign debt registration applications by issuers with investment grade ratings from the three credit rating agencies - S&P, Moody’s and Fitch. The Shenzhen NDRC 2017 Notice has essentially disqualified non-investment-grade issuers incorporated in Shenzhen that are considering offshore bond offerings.
Chinese companies that have issued bonds outside of China must have asked the following questions: Does the issuance of bonds need to be approved by or filed with the Chinese authorities? If yes, by or with which Chinese regulatory agencies, at what level and when? The answers to these questions are not always clear based on the rules promulgated by various Chinese regulatory agencies, and this lack of clarity has caused unnecessary confusion and anxiety among professional parties as well as Chinese companies. This memorandum briefly discusses the PRC foreign debt registration rules in connection with offshore bond offerings.
What regulators are relevant?
The Chinese governmental agencies that regulate “foreign debt” (including offshore bonds and bank borrowings) primarily include the National Development and Reform Commission (the “NDRC”), the State Administration of Foreign Exchange (the “SAFE”) and the People’s Bank of China (the “PBOC”), as well as their respective local counterparts. The State-owned Assets Supervision and Administration Commission of the State Council (the “SASAC”) will also be relevant if an issuer or borrower is a state-owned company. Each of these agencies plays a role in regulating the foreign debt space, and issues rules that sometimes conflict with each other.
Is it necessary for the offshore bond offering to be approved by the NDRC?
The short answer is no, at least if you take the applicable NDRC rules literally. On September 14, 2015, the NDRC issued the Circular on Promoting the Reform of the Filing and Registration System for Issuance of Foreign Debt by Enterprises (国家发展改革委关于推进企业发行外债备案登记制管理改革的通知) (the “2015 NDRC Circular”). The 2015 NDRC Circular has introduced a system of registering foreign debt prior to its issuance or incurrence to replace the previous case-by-case pre-approval system. Prior to the 2015 NDRC Circular, PRC companies’ issuance of offshore bonds would require NDRC pre-approval on a case-by-case basis. Some offshore bonds were offered by offshore special purpose vehicles of onshore Chinese parent companies partly to avoid this NDRC pre-approval. The 2015 NDRC Circular provides that local NDRCs with the authority to register offshore debt should simplify the filing procedures, and should prevent these procedures from effectively constituting an approval process (a so-called “disguised approval process”).
Do we need to worry about local counterparts of the NDRC?
Yes. In many cases, the local counterparts of the NDRC are gatekeepers, and the foreign debt registration applications are filed with them. In addition, under the 2015 NDRC Circular and subsequent rules issued by the NDRC, issuers incorporated in Shanghai, Tianjin, Fujian, Guangdong, Xiamen and Shenzhen must make foreign debt filings with the local counterparts of the NDRC unless they are central government-administered state-owned companies (including financial institutions). Foreign debt in each of these provinces and cities is subject to a pre-determined annual quota. The local counterparts of the NDRC in these jurisdictions may promulgate rules regulating the incurrence of foreign debt, and such rules may favor certain issuers while disqualifying others. For instance, under the Shenzhen NDRC 2017 Notice and another notice issued by Shenzhen NDRC in June 2016, Shenzhen NDRC will give priority to foreign debt registration applications by issuers with investment grade ratings from the three credit rating agencies S&P, Moody’s and Fitch, which generally disqualifies non-investment-grade issuers incorporated in Shenzhen.
When should a foreign debt application be filed with the NDRC?
Under the 2015 NDRC Circular, foreign debt must be filed and registered with the NDRC prior to its issuance or incurrence. This means that the registration procedure must have been completed, i.e., with a registration certificate obtained from the NDRC, prior to the issuance of offshore bonds. Under the NDRC Circular, the NDRC has up to five business days to decide whether to accept the pre-issuance registration application, and up to seven business days thereafter to issue a registration certificate. Although the pre-issuance registration procedure can be completed just prior to closing, to ensure deal certainty, it is advisable to start the foreign debt registration application process early so that the registration can be completed before launching the deal.
In addition to the pre-issuance filing, the 2015 NDRC Circular requires Chinese companies to file with the NDRC within 10 business days following the issuance of offshore bonds. If there is a significant discrepancy between the information contained in the pre-issuance registration application and the actual issuance or incurrence, the post-closing filing must provide an explanation for such discrepancy.
Who must file with the NDRC?
Under the 2015 NDRC Circular, onshore PRC enterprises or their controlled offshore subsidiaries or branches that issue offshore bonds or borrow mid-and-long term international commercial loans with maturity of longer than one year must file with the NDRC. On a literal reading, the 2015 NDRC Circular does not require “little red chips” (offshore companies controlled by a PRC national) to register their offshore bond offerings because “little red chips” are not controlled by a PRC enterprise. However, in practice, the NDRC has required that such offshore bond offerings be filed and registered. In addition, it is not entirely clear whether offshore companies with their main assets and operations in China need to file with the NDRC even though their ultimate shareholders are non-Chinese citizens. It is therefore advisable for issuers to consult the NDRC early in the process of the transaction.
What must be filed with the NDRC?
Under the 2015 NDRC Circular, the pre-issuance registration application must include an application report and debt issuance proposal setting out such information as currency, size of the offering, interest rate, maturity, use of proceeds and plan regarding whether or not to repatriate the proceeds. The 2015 NDRC Circular does not require credit rating reports. The local counterparts of the NDRC, however, may have additional information request. For instance, Shenzhen NDRC has specifically required that the issuer provide credit rating reports by at least one of the three international rating agencies mentioned above as part of the application documents.
Is it necessary to file foreign debt with the SAFE?
The short answer is yes if it is a domestic PRC issuer. The question is when such filing needs to be made with the SAFE. Under applicable SAFE rules, a corporate issuer needs to file with the SAFE or its local counterpart within 15 business days after the signing of financing documents. However, in January 2017 the PBOC issued the Circular of the People's Bank of China Regarding Unified Cross-border Financing Macro prudential Management Matters (《中国人民银行关于全口径跨境融资宏观审慎管理有关事宜的通知》) (the “2017 PBOC Circular”). The 2017 PBOC Circular (and its 2016 predecessor) provides that a corporate issuer needs to file with the SAFE after the signing of financing documents but not later than three business days prior to the drawdown. Local SAFEs have different interpretations of the 2017 PBOC Circular. Some local SAFEs take the position that corporate issuers can register under the SAFE rules, i.e., within 15 business days after the signing of the financing documents, while other local SAFEs are receptive to the pre-issuance filing under the PBOC rules. The different filing timing requirements under the relevant SAFE and PBOC rules and different interpretations among the local SAFEs have caused unnecessary confusion and anxiety among issuers and the professional parties involved in offshore bond offerings by PRC domestic issuers. It is advisable that for issuers to consult the SAFE early in the process of their offshore bond offerings.
Must onshore guarantees be registered with the SAFE and when?
Yes. Under applicable SAFE rules, PRC corporates may provide guarantees or other types of security in connection with offshore bond offerings without being subject to an annual quota or the need for approval by the SAFE. These rules require that the corporate security interest providers register the security with local SAFE within 15 business days from the date of the execution of a security agreement. Material changes to any of the terms of the security agreement or the principal contract must be registered with the local SAFE within 15 business days. Any discharge of such security should also be registered
The regulatory filing and registration system for offshore bond offerings involves different regulatory agencies. Each of the agencies may issue rules regulating offshore bond offerings, and such rules may sometimes conflict with each other. In addition, the regulators have a lot of discretion in interpreting and implementing the rules. The NDRC, for instance, has exercised such discretion to require “little red chip” companies to file and register their offshore bond offerings. Shenzhen NDRC has released rules that have essentially disqualified Shenzhen-incorporated non-investment-grade issuers. It is, therefore, advisable for issuers and their professional advisors to address the regulatory filing and registration requirements early in the process of the offshore bond offering.
March 17, 2017