CIRC Promotes Foreign Private Equity Participation in Restructurings

On 29 June 2018 the China Insurance Regulatory Commission (CIRC) issued its Administrative Measures for Financial Assets Investment Companies (Trial) (the Measures). The overall gist of the Measures is to bring about deleveraging and meaningful restructuring of indebted companies (both balance sheet and operational). To achieve this goal, the CIRC wants domestic banks to be shareholders of financial asset investment companies, and will also allow any proportion of foreign investor participation.

The declared aims of the Measures include ensuring that financial asset investment companies acquire non-performing assets (NPAs) by means of true sales. The CIRC laid out several examples of transactions for criticism because they are sham transactions or otherwise provide recourse to sellers of NPAs, which in the CIRC’s view would both fail to lead to genuine restructuring of viable enterprises and possibly bring NPAs back onto the balance sheet of the domestic bank that sold the NPAs. In setting out its policy goals, the CIRC expressly mentions the need for genuine restructurings of viable enterprises and not zombie companies. The Measures also require comprehensive risk management and risk isolation in the sector and capital management to be done to professional standards. The CIRC’s expectation is that, cumulatively, the Measures will reduce leverage in the Chinese economy by providing a route to restructuring and work-outs. The Measures are timely, given that Bloomberg reported this week that year-to-date defaults on corporate bonds in China are running at 75 per cent of the total defaults in 2017.

A spokesperson for the relevant department of the CIRC reportedly issued a statement that, “in line with the spirit of opening up to the outside world, the Measures impose ‘national treatment’ on foreign-invested institutions investing in financial asset investment companies, and there is no restriction on the proportion of foreign ownership.” In previous cycles of China’s distressed debt market, some foreign investors in distressed debt have expressed concerns that they were effectively limited to participating only in the least-marketable niches of the market. Because the Measures require financial asset investment companies to be established by domestic commercial banks as major shareholders, but do not require commercial banks to control such companies, and given that there is now no limit on the proportion of foreign ownership, the way may be opened for more meaningful participation by foreign investors in restructuring and work-outs.

The Measures also clarify that a number of funding options are available to financial asset investment companies, including (1) raising funds from qualified investors and using private equity asset management products to support debt-to-equity swaps, (2) permitting financial asset investment companies to set up subsidiaries to act as a private equity investment fund manager and private equity investment funds, (3) bond issuances and (4) the use of bond repo transactions and interbank lending. However the Measures emphasise that the operations of the financial asset investment company must be firewalled off from the operations of any domestic bank that is a shareholder.