The major reform has introduced a registration system for offshore bonds sold by corporates (including financial institutions). This replaces the current case-by-case approval system, in which issuers are approved to raise a set amount within a certain timeframe.
The guidelines were released on September 15 but do not have a publicised start date, which is not unusual for Chinese regulatory guidance. Understandably bankers have raised the question about whether deals that have started roadshows, or are priced but are yet to settle before that date, now need to register with the NDRC.
There are understood to be four deals that fall into this grey area. They are China Securities (International) Finance Holding Company’s $200m 3.125% 2020s, Industrial and Commercial Bank of China’s $2bn 4.875% 2025 tier two, Shanghai Pudong Development Bank’s $500m 2.5% 2018s, and Zhejiang Geely Holding Group’s $300m 2020 floater. All four transactions have already priced, but are only due to settle between September 17-23.
A banker working on one of the bonds told GlobalRMB, a sister publication of GlobalCapital Asia, that the feedback its law firm received from the regulator was that in order to encourage more issuance, the unsettled deal will not be required to submit a registration. It should, however, explain in any disclosures that there was no registration because the deal priced before the release of the guidelines.
“We don’t know about the others, but the deal we are on will need to do the related information disclosure after the issuance according to the law firm we are working with,” said the banker
Under the new system deal registration should take place before issuance and any related information should be disclosed within 10 days of selling.
Compared to the time consuming case-by-case system where an approval can take months, at first glance the new regime would seem to be a big improvement. But bankers are yet to get any answers about whether all bonds that register will be automatically approved or how long any approval might take.
“I’m not quite sure I fully understand how the registration system will work,” said a DCM banker in Hong Kong. “Based on my previous experiences with the Chinese regulators, the chance of it giving nod to every deal that registers with the NDRC is quite low. Therefore, it might mean there will be pre-registration check on issuers’ credentials.”
A third banker told GlobalRMB that the firm’s lawyer said the NDRC would respond to the registration within five days, once the issuer finishes registration under the new guidelines.
More complicated?
Perhaps more worrying is the fact that the new guidelines could make it more onerous for Chinese borrowers to use offshore vehicles to sell foreign debt.
In the document, the NDRC says that foreign debt refers to instruments, either in renminbi or foreign currencies, issued by Chinese onshore corporates or their offshore entities or branches in the offshore market.
This is a marked difference from the 2003 version of the guidelines which defined issuers of foreign debt as “onshore institutions”.
This could be a problem as almost all offshore bonds from Chinese issuers are sold by their offshore subsidiaries or branches, especially for deals denominated in foreign currencies.
The offshore dollar market is by far the one in which Chinese issuers are most active offshore. Year-to-date, they have raised roughly $70bn from 104 transactions, which makes up close to half of the total volumes out of Asia ex-Japan, according to Dealogic. And among those deals, 96 were issued by Chinese offshore subsidiaries.
And aside from China Development Bank (CDB) and China Export and Import Bank ( Chexim ), the NDRC has not approved any offshore dollar issuance from onshore entities since 1997. Even when it comes to offshore renminbi bonds, 2012 is the only time the NDRC has approved a batch of deals from onshore SOEs such including Baosteel Group.
“Before the launch of these new guidelines, all our Chinese issuers in dim sum or US dollar deals were offshore based, and these entities don’t need issuance approvals from the NDRC, who used to only supervise onshore headquarters,” said the first banker. “But now, according to the new rules, obviously all Chinese issuers, offshore or onshore, need to register with NDRC first.”
Bankers are divided about whether this shows a new level of control by regulators. Many believe that they will need to register all such deals with the NDRC in the future to ensure a successful sale and that the new rules are just another regulatory step. However, others reckon that it seems more like the NDRC wants to expand its supervision over corporates’ overseas borrowing.
“We will need some time and actual deals to see how these new guidelines will really work. Nobody really knows so far, and everyone has his own interpretation,” said a third banker.
Additional reporting by Rev Hui.