Lawyers’ role crucial in preparing syndicated loans for big projects

According to the size of financing for a large-scale project as well as the progress and schedule for the use of funds, financing will sometimes be done by various methods such as a renminbi syndicated loan, foreign currency syndicated loan and renminbi revolving credit line syndicated loan.

The principal parties to a syndicated loan comprise a lead bank, a co-lead bank, a guarantee correspondent bank, a clearing correspondent bank and various other participants. Since they need to balance their respective interests with due regard to their respective business models, the syndicated loan becomes relatively complex in terms of the design of a legal framework or a credit structure, or other aspects.

To secure the loan facility successfully requires analysing the business features of the participants and designing a credit structure acceptable to the borrower, together with concisely designed and practical legal terms for the lending policies of participants, and setting reasonable conditions precedent for the syndicated loan. Professional legal services are essential.

Loan coordination and arrangement

To ensure the need for funds is met at various stages of a construction project, and to take into account the overall supervision of funds for the project and the implementation of guarantee measures, different types of syndicated loan under a project could be coordinated and arranged in a loan contract.

First, the arrangements for the principal parties to a large-scale project in a syndicated loan contract must be in compliance with relevant legal requirements. Since the lead bank in a renminbi syndicated loan, a foreign currency syndicated loan or a renminbi revolving credit line syndicated loan may not be involved in all of the syndicated financing, a loan contract using co-lead banks will generally be designed to satisfy the requirements under the Guidelines for the Syndicated Loan Business, and to avoid any situation where if a single bank acts as the lead bank, its committed share will be, in principle, less than 20% of the total amount of the syndicated financing.

Second, with respect to the design of the terms for the loan, the contract can be divided into several parts such as common terms, exclusive terms and annexes. The general particulars of syndicated loans of a different nature can all be set out under the section of common terms such as definitions, conditions precedent for withdrawal of funds, project capital, insurance, tendering and bidding, engineering supervision, information disclosure, project supervision, account opening and supervision, clearing, as well as settlement and sales of foreign exchange, guarantee, authorisation of the borrower, costs and expenses of the syndication, loan supervision, changes in laws and the environment, anti-corruption clauses, severability and other terms.

Finally, the principal parties may individually set out their respective exclusive clauses for a renminbi syndicated loan, a foreign currency syndicated loan and a renminbi revolving credit line syndicated loan to govern different matters. If a renminbi syndicated loan and a foreign currency syndicated loan contain similar exclusive terms, these terms may be written into a special chapter that comprises various terms such as adjustment to the credit line, purpose of the loan, term of the loan, loan interest rates and interest, withdrawal and repayment. Given the particularities of a renminbi revolving credit line syndicated loan in various aspects such as purpose of the loan, term of the loan, loan interest rates and withdrawal, a special chapter on this section should be introduced to govern the rights and obligations of participants.

Such design not only deals with the integrity of the syndicated contract, but also helps lenders and borrowers to work together on solving the legal or business issues involved in the loans.

Legal vacuum

In addition to the syndicated loan contracts and syndicated loan inter-bank cooperation agreements, a secured credit structure involves other legal documents as well, which generally include an agreement on the transfer of insurance benefits, an agreement on the pledge of the rights to earnings, an equity pledge agreement and an asset-backed agreement.

The Measures for Registration of the Pledge of Receivables in People’s Bank of China Decree No. 4 [2007] say the People’s Bank of China Credit Information Centre is the agency for the registration of the pledge of receivables. However, there are no legal or regulatory provisions in place to govern whether the pledge of other rights to earnings (such as return on equity, creditor’s right, depreciation of fixed assets, etc.) could be registered at the People’s Bank of China Credit Information Centre.

Article 13 of the State Council’s Implementing Opinions on Several Policies and Measures for the Development of the Western Part states that more loans will be granted for the pledge of the rights to earnings, or the rights of charging royalties from infrastructure projects. However, there are no specific laws or regulations at the moment that clearly define a specific authority for the registration of the pledge of mining rights, and rights to earnings, from equity investment, asset investment, depreciation of fixed assets, dividends for shareholders, mobile phone charges and power grids in rural areas.

The lack of such laws and regulations has seriously damaged the security of syndicated loan transactions.

Learning from others

In a complex syndicated loan, lawyers should analyse the feasibility of cross-default clauses and assess the capacity and the internal approval procedures of a borrower. Lawyers’ design of the binding terms for the disposition of property of a borrower (meaning a borrower is not permitted to dispose of assets that account for more than 10%, which can be adjusted, of its net assets to an external party without the written consent of a lender) or design of the negative guarantee terms (meaning a borrower is not permitted to provide other guarantees to an external party without the written consent of a lender) may determine whether syndicated financing is successful.

Lawyers should work out operable legal clauses by perfectly combining the research methods of the science of law, sociology and economics with those of finance and banking in order to provide quality services for lenders or borrowers.

Li Yunhai is head of the finance practice at Zhonglun W&D Law Firm, and Tian Lei is deputy head of the firm’s real estate and construction practice