China - The Issuance Of Foreign Debts By Enterprises - Q&A Series No.1 - NDRC’s Answers To FAQs On Filing & Registration For The Issuance Of Foreign Debts By Enterprises.

Legal News & Analysis - Asia Pacific - China - Banking & Finance

13 April, 2020

 

In recent years, issuing debts overseas (including borrowing of mid-and-long term commercial loans) has gradually become one of the important channels for corporate financing. By issuing debts overseas, enterprises are able to not only make full use of both domestic and overseas markets to reduce financing costs, but also to expand into global markets.

 

In February 2020, the National Development and Reform Commission (“NDRC”) announced their "Answers to Frequently Asked Questions on Filing and Registration for the Issuance of Foreign Debts by Enterprises". We want to take this opportunity to share with enterprises and other professional organizations some of the legal issues we’ve encountered in practice with respect to the issuance of foreign debts by enterprises, including but not limited to: (1) The approval, filing, and registration procedures of domestic governmental authorities and the preparation of related application documents; (2) The use and remittance of proceeds; (3) Credit enhancement measures for the issuance of foreign debts; (4) Transaction documents for the issuance of foreign debts; (5) Choosing the market where overseas bonds are listed; (6) Precautions for enterprises in different industries issuing foreign debts; (7) Choosing an issuance structure and tax considerations; (8) The distinctions between senior bonds, perpetual bonds and convertible bonds.

 

No.

Questions

NDRC’s Answers

JUNHE’s Comments

 

1 Under what circumstances are filing and registration for the issuance of foreign debts required?

 

Answer: In accordance with the Circular on Promoting Reform on the Administration of Filing and Registration System for the Issuance of Foreign Debts by Enterprises (Fa Gai Wai Zii [2015] No. 2044) promulgated by NDRC ("Circular No.2044"), for debt instruments borrowed overseas by  domestic enterprises as well as  offshore enterprises or branches controlled by such domestic enterprises, with a maturity longer than one year, denominated in RMB or foreign currencies, with principal and interest repaid as scheduled, including bonds and mid-and-long term international commercial loans, etc., an application for filing and registration in advance with NDRC is required. 

 

  • Although Circular No.2044 itself stipulates that to be applicable for offshore enterprises controlled by domestic enterprises (i.e., “Large Red-Chip Companies”), through window guidance since 2016, NDRC requires offshore enterprises controlled by domestic natural persons (i.e., “Small Red-Chip Companies”) to file and register in accordance with Circular No.2044 for the issuance of foreign debts;

  • Although Circular No.2044 mainly applies to the issuance of foreign debts, filing and registration is also required for overseas borrowing of mid-and-long term international commercial loans. 

 

2 Do debt instruments with a maturity “longer than one year” also include those of exactly one year?

 

Answer: “Debt instruments with a maturity longer than one year” do not include debt instruments with a maturity of exactly one year.

 

  • In practice, taking into consideration the repayment processing time, the maturity period of short-term bonds or loans is generally set prudently to be 364 days or shorter;

  • Although filing and registration is not required for foreign debts with a maturity of one year or less, NDRC does not support enterprises using mid-and-long term foreign debts to repay foreign debts with a maturity of one year or less.

  • Although filing and registration with NDRC is not required for foreign debts with a maturity of one year or less, depending on the issuance structure, foreign debts registration or onshore guarantees for offshore loans registration may still be required in accordance with the relevant requirements of the People's Bank of China (“PBOC”) and the State Administration of Foreign Exchange.

 

3 "An application for filing and registration in advance with NDRC is required for the issuance of foreign debts by enterprises"—here, does “in advance" mean  prior to signing the contract or prior to the actual issuance?

 

Answer:  “In advance” refers to “prior to issuance”.

 

For mid-and-long term international commercial loans, enterprises are allowed to draft contract(s) and sign framework agreement(s) before filing and registration with NDRC, but filing and registration with NDRC is required before withdrawal. Enterprises can issue foreign debts only after obtaining NDRC’s approval on the filing application. 

 

  • For bond issuance projects, generally before pricing;

  • For MTN programmes, generally before the first drawdown;

  • For loan projects, generally before withdrawal.

 

4 Can enterprises directly apply to NDRC for  filing and registration for the issuance of foreign debts?

 

Answer: The group headquarters (headquarters, head office, etc.) of enterprises and other financial institutions managed by the central government submit filing and registration applications to NDRC, while local enterprises (including local financial institutions) apply directly to NDRC for filing and registration.  

 

  • The group headquarters of enterprises managed by the central government may apply for an overall quota and then allocate this to each subordinate company to use; or a subordinate company may independently apply to the group headquarters which shall then apply for the subordinate company's foreign debts quota;

  • Local enterprises directly apply to NDRC, but in practice, the original copy of the filing and registration certificate will be forwarded to the applying enterprise by the local development and reform committee. 

 

5 Can an offshore enterprise be the applicant for the filing and registration for the issuance of foreign debts?

 

Answer: No. For the issuance of foreign debts by domestic enterprises as well as  offshore enterprises or branches controlled by such domestic enterprises, the domestic enterprise should be the applicant for filing and registration with NDRC. 

  •  

  • Small Red-Chip Companies need to use domestic operating companies under their control, as the applicants;

  • Large Red-Chip Companies need to use their onshore parent companies as the applicants.

 

6 Does the filing and registration requirement only apply to the public issuance of foreign debts? Is filing and registration also required for the private placement of convertible bonds by investment companies? 

 

Answer: The application of filing and registration requirement is not limited to the public issuance of foreign debts. Filing and registration is also required for the private placement of convertible bonds by investment companies. “Foreign debts” herein refer to debt instruments issued overseas which include but are not limited to common bonds, senior bonds, financial bonds, perpetual bonds, convertible bonds, preferred shares, etc.

 

  • Filing and registration is required regardless of a public issuance or private placement.

  • Filing and registration is required no matter whether the proceeds are used onshore or offshore. 

 

7 Our company (a domestic enterprise and an offshore enterprise or branch controlled by such a domestic enterprise) is borrowing mid-and-long term international commercial loans, rather than issuing foreign bonds. Is an application for filing and registration with NDRC mandatory? If yes, what application documents do we have to submit?

 

Answer: “Foreign debts” referred to in Circular No.2044 include mid-and-long term international commercial loans, therefore filing and registration with NDRC is required. The preparation of the application documents can reference those of a foreign bonds issuance scenario. 

 

  • Compared to the application documents for foreign bonds issuance, the main difference in a mid-and-long term international commercial loans scenario is that the lending parties’ letter of intent or documents of the same effect is required. 

 

8 If a domestic enterprise (as well as an offshore enterprise or a branch controlled by such a domestic enterprise) is borrowing foreign debts with a maturity longer than one year from offshore enterprises (including offshore shareholders), is filing and registration with NDRC required?

 

Answer: Yes.

 

  • If the domestic enterprise is a foreign-invested enterprise, the amount of its foreign debts shall also be subject to 1) the difference between its total investment amount and its registered capital, or 2) the regulatory standards of “macro-prudential management” of PBOC.

 

9 For the issuance of foreign debts by an offshore enterprise controlled by a domestic natural person, is filing and registration required?

 

Answer:In cases where an offshore enterprise controlled by a domestic natural person issues foreign debts, filing and registration is required.

 

  • If a domestic natural person becomes a foreign national or obtains Hong Kong, Macao or Taiwan status, it is necessary to take a comprehensive look at the year in which such a change occurred and the source of the business income of the controlled enterprises;

  • If the domestic natural person is only a minority shareholder of an offshore enterprise, it’s also necessary to consider the situation of the other shareholders as well as the source of the business income of such offshore enterprises when considering whether filing and registration is required for the issuance of foreign debts.

 

10 A domestic enterprise (as well as the offshore enterprise or branch it controls) plans to borrow a revolving loan from offshore banks, with each single loan’s maturity less than a year but the credit period exceeds one year. Is filing and registration with NDRC required?

 

Answer: Yes.

 

  • For a revolving loan with a total maturity exceeding one year, filing and registration is required;

  • If, prior to maturity, a loan with a maturity of one year or less is expected to be extended to more than one year, the foreign debts registration certificate is required to be obtained from NDRC before maturity; in cases where such a registration certificate has not been obtained yet, we suggest repaying the existing loan by cash or exchange mechanism, then a borrowing loan with a maturity of one year or less.

 

11 Our company plans to issue two foreign debts. Should we submit two applications, or can we combine those two debts into one application? 

 

Answer: One application is fine.

 

  • It should also be allowed to combine the filing and registration application for foreign bonds and the filing and registration application for mid-to-long term international commercial loans into one application, but we suggest to specify the quota respectively. Also, for loans, a lending parties’ letter of intent or documents of the same effect should be included. 

  • In cases where the proceeds raised through debt issuance by offshore enterprises are expected to be remitted onshore through loans, they are deemed to be foreign debts by the domestic enterprise as well. It is recommended to explain such a plan in the application letter;

  • After applying for filing and registration for foreign bonds issuance, if it is necessary to use such a quota for commercial loans, it is recommended to apply to NDRC for a change of financing mode, and vice versa.

 

12 Is filing and registration required for domestic financial institutions transferring non-performing loans overseas?

 

Answer: In accordance with the Circular of NDRC on Effectively Conducting Reform of Foreign Debt Administration concerning Overseas Credit Assignment (Fa Gai Wai Zi [2016] No.1712), “for domestic financial institutions transferring non-performing loans to foreign investors thus forming domestic enterprises’ foreign debts, Circular No. 2044 applies, thus managed under the enterprise foreign debts registration system."

 

  • When foreign investors acquire domestic non-performing assets, they need to prompt the seller to complete the foreign debts filing and registration, and use this as a precedent condition for closing;

  • Foreign debts filing and registration does not apply where foreign investors purchase non-performing assets backed bonds through "Bond Connect".

 

13 Which enterprises that are applying for filing and registration for the issuance of foreign debts are required to submit a Letter of Commitment to Authenticity?

 

Answer: All enterprises.

 

  • Any misrepresentations may be recorded into the National Enterprise Credit Information Publicity System.

 

14 Specifically, which enterprise is responsible to submit  a Commitment Letter to Authenticity?

 

Answer: The entity having actual control of the enterprise or the actual determining power over the foreign debts.

 

  • A Small Red-Chip Companies’ application of filing and registration for foreign debts should be submitted by its domestic entity, and the Commitment Letter to Authenticity should be issued by the applicant.

 

15 “NDRC exercises scale control over the issuance of foreign debts by enterprises, reasonably determining the total volume and structural control goals”— Is “scale control” exercised over the headquarters or each subordinate? 

 

Answer: “NDRC exercises scale control over the issuance of foreign debts by enterprises”, refers to the control over the national foreign debts issuance scale.

 

  • As mentioned above, the foreign debts quota obtained by the headquarters can be allocated to each subordinate company to use.

  • If the quota applied by a subordinate is to be used by the headquarters, it is recommended to communicate with NDRC regarding a change of issuers.

 

16 Can an enterprise’s credit  report affect the result of the filing and registration for foreign debts issuance?

 

Answer: Yes.  Enterprises can visit www.creditchina.gov.cn in advance to check their credit report. 

 

  • Failure to file and register also affects an enterprise’s credit report and affect its future filing and registration for the issuance of foreign debts.

 

17 If an enterprise engages in debt incurrence to conduct investment activities, should it file and register for foreign debts issuance, or apply for approval/filing for overseas investment?

 

Answer: Under Circular No.2044, filing and registration for foreign debts issuance is required when enterprises borrow foreign debts; if this constitutes  overseas investment under the Measures for Administration of Overseas Investment (NDRC 2017 No.11) at the same time, then approval or filing for overseas investment is also required. 

 

  • If the purpose of the issuance of foreign debts is for overseas investment, it is recommended to obtain the approval or filing of overseas investment in advance. 

 

18 An enterprise has obtained the filing and registration certificate for foreign debts issuance, which is valid until the end of March. What if the pricing can be done by March but the closing can only occur in April?

 

Answer: In this scenario, as long as the pricing can be completed by the end of March, there will be no impact on the issuance of bonds.

 

  • For overseas bonds, only the pricing date is required to be before the registration certificate’s expiry date;

  • Previously, the foreign debt quota generally expired on September 30th or December 31th; now it is one year from the date of the registration certificate;

  • According to our past experience and considering the epidemic this year, the filing and registration validity period can be extended by NDRC due to special circumstances. 

 

19 The mid-to-long term international business loan applied for by my company is three years, but the registration certificate for foreign debts issuance is only valid for one year. What should I do?

 

Answer: The enterprise should withdraw within the validity period of the registration certificate, and the loan period is subject to the loan agreement.

 

  • For overseas loans, it is only required that the first withdrawal date (note: revolving loans may have multiple withdrawal days) be within the validity period of the filing certificate.

 

20 For mid-to-long term international commercial loans, is it necessary to report the issuance information (the information report form for the issuance of foreign debts by enterprises) to NDRC? When should I report?

 

Answer: Yes, the issuance information (the information report form for the issuance of foreign debts by enterprises) should be reported to NDRC within 10 working days after each withdrawal.

 

  • The pre-filing and post-reporting of mid-to-long term international commercial loans can refer to those for the issuance of foreign bonds.

 

21 After filing and registration and when reporting issuance information (the information report form for the issuance of foreign debts by enterprises), if the issuer is the offshore subsidiary, and the applicant is the domestic parent company, should the column of "Issuer" be the domestic parent company or the offshore subsidiary that is actually issuing bonds?

 

Answer: In this circumstance, the column of "Issuer" should be: “the name of the offshore subsidiary that is actually issuing bonds (the name of the domestic parent company)”.

 

  • If the parent company provides a guarantee, it is recommended to mention this.

  • For the "comments" column, it is recommended to include the foreign debts issuance registration certificate document number.

 

22 After reporting the issuance information (the information report form for issuance of foreign debts by enterprises), will NDRC issue a reply?

 

Answer: No.

 

  • Post-reporting is an important part of corporate compliance. It would be helpful if NDRC develops an online-reporting system, which automatically generates a report certificate or sends a message to the enterprise after the enterprise reports;

  • In the absence of a certificate, it is recommended that the enterprise  informs the bond trustee or lender by attaching the report form.

 

23 Do I need to make an appointment before submitting the application documents on site for foreign debts?

 

Answer: No.

 

  • During the epidemic, the government affairs service hall suspended its on-site window services.

 

24 Can I mail the application documents? What is the mailing address?

 

Answer: Yes.

Mailing address: Window No.2, NDRC service hall, 5th South Rally of Sanli River, Xicheng District, Beijing.  TEL:010-68505042.

 

  • Before mailing, you need to register online and get a registration number. Proof of the on-line registration can be mailed together with the application documents.

 

25 Where can I find filing and registration guidance for foreign debts issuance (mid-to-long term international commercial loans)?

 

You can view the guidance under the "Scale Management for Foreign Debts" in the “Application & Report" section of the government service hall website.

 

  • “Governmental Services” on NDRC’s official website: www.ndrc.gov.cn.

 

Note:

 

The “Questions” and “NDRC’s Answers” set out in the above table are from NDRC’s official website.

 

The "JUNHE Comment" above contains our understandings. It summarises our legal service practice for foreign debts issuance by enterprises. If an enterprise encounters similar problems, it is recommended to confirm with NDRC verbally or in writing.

 

Jun He 4  

 

For further information, please contact:

 

YU, Yongqiang (YY) , Partner, Jun He

yuyq@junhe.com