Xinhu (BVI) Holding Company Limited’s offering of US$700 million in guaranteed senior notes marked the largest debut high-yield bond issuance by a PRC company since January 2013, and the process required expertise, resources and commitment, the legal counsel involved said. Xinhu (BVI) Holding Company Limited’s offering of US$700 million in guaranteed senior notes marked the largest debut high-yield bond issuance by a PRC company since January 2013, and the process required expertise, resources and commitment, the legal counsel involved said.
Zhou Hao, a Hong Kong-based partner at King & Wood Mallesons (KWM), told China Business Law Journal the process was a big challenge for the firm. “Firstly, it is widely known in the market that a US law-style high yield covenant package is very complicated,” he said. “A typical summary of the covenant package included in the offering circular will be more than 150 pages long. It takes years for a lawyer to build up sufficient knowhow and experience to grasp this technology.”
Secondly, said Zhou, it takes the issuer’s counsel a tremendous amount of time to educate the client on everything from the basics to tailoring the covenants based on specific business needs in first-time issuances, although this process should get easier in repeat issuances.
“Thirdly, most debut issuances are by A-share listed companies whose management team barely speak much English,” he said. “The covenants are written in legal English, which is difficult even for English native speakers to comprehend. The first real PRC high-yield bond was issued around 2005. Lawyers who have continuously practiced in this area here in Asia for more than 10 years number less than 10, among whom only three are native Mandarin speakers.”
The 6% guaranteed senior notes issued by Xinhu (BVI) will be due in 2020 and were guaranteed by Xinhu Zhongbao. According to Zhou, it is widely anticipated that high-yield bond issuances will surge in 2017. “A large number of high-yield bonds issued during the peak years from 2010 to 2013 are either maturing or approaching their optional redemption date in 2017, therefore there is a huge refinancing need,” he said.
China’s regulatory authorities have tightened control over capital outflows, but also relaxed regulations on offshore financings, “which is a clear sign that the government is encouraging PRC companies to raise funds offshore”, said Zhou. “Many Chinese companies, including private companies that constitute the most part of high-yield bond issuers, now are considering offshore bonds or loans to fund their overseas acquisitions. In other words, there is a huge acquisition financing need.”
Zhou observed that the overall high-yield market has improved significantly in the past six months, with many debut issuers from different industries. “Good names are chased by investors and many books are significantly oversubscribed,” he said. “Demand for good credit at a reasonable price is high.”
KWM advised Xinhu (BVI) Holding Company as its US and PRC counsel. The KWM US counsel team based in Hong Kong was led by Zhou. The KWM PRC counsel team based in Hangzhou was led by partner Huang Renzhong.