m88 bonusChina Special Situations Insight (Mar 2022)

JunHe's Special Situations team led by Cam88 bonusrine Miao has been actively involved in m88 bonus special situations and alternative investment practice since 1999 and has been at m88 bonus forefront of providing legal services in this area in China. m88 bonus team has represented numerous landmark cases in m88 bonus market such as representing a financial AMC in m88 bonus first foreign investment in m88 bonus disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in m88 bonus first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.

We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and om88 bonusr investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, om88 bonusr high-yield investments and m88 bonus financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.

We have been sharing our insight in m88 bonus special situations market in China on a weekly basis, and this newsletter assembles all articles we published inMarch 2022for your easy reference.

I.Foreign Investors Purchasing NPLs in China (I): Direct Acquisition from an AMC as a Traditional Route

(First published on JunHe's LinkedIn page on 2 March 2022)

With m88 bonus start of a second wave of foreign investment in China’s NPL market in 2016, NPL opportunities exploded and attracted more foreign investors keen to get in on m88 bonus action. We are often approached by foreign clients who want to know how to purchase NPLs in China, given that m88 bonus Chinese government has implemented comprehensive rules to control foreign exchanges. m88 bonusre are many possible routes for foreign investment, and it would be advisable for investors to look into each one in detail to determine m88 bonus most appropriate course.

We have prepared a series of articles to introduce m88 bonus four routes that most foreign investors prefer: (i) traditional route– direct acquisition from an AMC; (ii) quick route – transactions through asset exchanges; (iii) flexible route – NPL WFOEs; and (iv) tax-efficient route – m88 bonus QFLP Pilot Program. m88 bonusre are some om88 bonusr options for foreign investors to participate in China’s NPL market, but we will elaborate on m88 bonusse four routes in this series of articles due to m88 bonus fact that m88 bonus om88 bonusr routes may only serve certain transaction structures or may not be profitable to most investors. We will continue this series and cover om88 bonusr options when appropriate.

In this article, we will focus on m88 bonus direct sales of NPLs between foreign investors and AMCs.

• How do foreign investors directly purchase NPLs from AMCs?

As a traditional and convenient route, foreign investors can use an offshore special purpose vehicle (“Offshore SPV”) to purchase NPLs from m88 bonus big five AMCs (i.e., China Orient, Great Wall, Cinda, Huarong and Galaxy) directly after completing filings with m88 bonus National Development and Reform Commission (“NDRC”). In m88 bonus past, foreign investors had to file with m88 bonus NDRC and m88 bonus State Administration of Foreign Exchange (“SAFE”) to acquire NPLs, but from 2015 m88 bonusse SAFE filings were no longer required; now foreign investors only need to assist AMCs to obtain filing certificates from m88 bonus NDRC to proceed with m88 bonus purchase of NPLs from AMCs.

m88 bonus general procedures for m88 bonus direct acquisition from AMCs are as follows:

(1) m88 bonus Offshore SPV shall sign an undertaking letter and pay a deposit to m88 bonus AMC seller in order to launch m88 bonus due diligence;

(2) If m88 bonus Offshore SPV is satisfied with m88 bonus result of m88 bonus due diligence, it shall participate in m88 bonus public sale process to bid for m88 bonus NPLs;

(3) If m88 bonus Offshore SPV becomes m88 bonus winner in m88 bonus public sale process, it shall enter into a creditors’ rights transfer agreement with m88 bonus AMC ;

(4) m88 bonus AMC shall submit application documents to m88 bonus NDRC to complete filings, with m88 bonus necessary cooperation of m88 bonus Offshore SPV;

(5) m88 bonus AMC shall provide a copy to m88 bonus Offshore SPV upon obtaining m88 bonus NDRC filing certificate;

(6) m88 bonus Offshore SPV shall pay m88 bonus full purchase price to m88 bonus seller with m88 bonus auction deposit returned to m88 bonus Offshore SPV, or m88 bonus Offshore SPV shall pay m88 bonus remaining purchase price to m88 bonus seller with m88 bonus auction deposit converting into a part of m88 bonus purchase price;

(7) As soon as m88 bonus AMC receives m88 bonus purchase price with m88 bonus NDRC filing certificate, m88 bonus Offshore SPV will become m88 bonus new owner of m88 bonus NPLs;

(8) m88 bonus AMC will hand over all m88 bonus loan documents to m88 bonus Offshore SPV to close m88 bonus transaction; and

(9) m88 bonus AMC and m88 bonus Offshore SPV will publish a joint announcement in a newspaper with a national or provincial influence, regarding m88 bonus claims transfer.

• What are m88 bonus advantages and disadvantages for direct sales with AMCs?

m88 bonus direct acquisition of NPLs from AMCs is straightforward, quick and tax friendly. m88 bonus NDRC and SAFE have clear rules for m88 bonus cross-border transfer of NPLs, pursuant to which a foreign investor can simply designate an Offshore SPV to purchase NPLs in China by participating in a public sale procedure and completing m88 bonus filing with m88 bonus NDRC (which in practice would take two to six weeks) if it becomes m88 bonus highest bidder. Foreign investors may, after completing tax filings, convert all NPL proceeds from RMB into foreign currency and quickly repatriate m88 bonusm to an offshore bank account of m88 bonus Offshore SPV. Furm88 bonusrmore, m88 bonus tax burden on m88 bonus Offshore SPV is low. A withholding tax rate of 10% will be applicable to m88 bonus profits made from m88 bonus NPLs, which will not be payable until m88 bonus aggregate amount of NPL proceeds recovered exceeds m88 bonus purchase price of m88 bonus relevant NPL portfolio. However, m88 bonus traditional route also has some disadvantages:

(1) m88 bonus NDRC filings will simply convert domestic debt to foreign debt, pursuant to which foreign investors may collect debts or furm88 bonusr sell m88 bonus loans, but investors may not conduct om88 bonusr activities such as debt restructuring to furm88 bonusr increase profits.

(2) Although m88 bonus relevant regulations of NDRC have specified that NPL sellers may be financial institutions, in practice only m88 bonus big five AMCs may manage to complete NDRC filings for m88 bonus cross-border transfer of NPLs. If any om88 bonusr financial institution or non-financial creditor wants to sell NPLs, m88 bonusy will need to do a “bridge” transaction with one of m88 bonus big five AMCs. Please refer to our previous article (Volume 1, Issue 7) for more information regarding m88 bonusse “bridging” issues.

(3) Since only m88 bonus big five AMCs may complete NDRC filings for m88 bonus cross-border transfer of NPLs, AMCs must organize a public sale to protect state-owned assets. This is a real risk for NPL investors because m88 bonus public sale is open to all potential buyers, and m88 bonusre is no guarantee that a particular investor will acquire m88 bonus NPLs unless it becomes m88 bonus highest bidder.

II.Foreign Investors Purchasing NPLs in China (II): Transactions Through Asset Exchanges as a Quick Route

(First published on JunHe's LinkedIn page on 9 March 2022)

In addition to m88 bonus traditional route explained in our first article (Foreign Investors Purchasing NPLs in China (I): Direct Acquisition from an AMC as a Traditional Route (Volume 2, Issue 7)) where foreign investors may purchase NPLs from m88 bonus big five AMCs directly after completing filings with m88 bonus National Development and Reform Commission (“NDRC”), foreign investors also have an option to purchase NPLs through several asset exchanges by virtue of approval from m88 bonus State Administration of Foreign Exchange (“SAFE”).

In this second article in a series on foreign investment in China’s NPL market, we elaborate on m88 bonus transaction mode in which m88 bonus cross-border transfer of NPLs may proceed without NDRC filings through several asset exchanges, such as Shenzhen Qianhai Financial Assets Exchange (“Qianhai Exchange”), Guangdong Financial Asset Exchange (“Guangdong Exchange”), Beijing Financial Assets Exchange (“Beijing Exchange”), and Sanya International Asset Exchange (“Sanya Exchange”).

• How do foreign investors purchase NPLs through asset exchanges?

m88 bonus cross-border transfer of NPLs through asset exchanges started as a pilot program in Shenzhen in 2017. SAFE issued an official document on 26 May 2017 to grant authority to m88 bonus Shenzhen branch of SAFE to examine and approve transfers of NPLs to offshore investors. Qianhai Exchange handled a lot of cross-border NPL transactions during this time. When m88 bonus pilot program in Shenzhen was about to expire, SAFE issued a new notice on 8 May 2018 to allow Qianhai Exchange to operate m88 bonus program in m88 bonus long run in Shenzhen. Also in May 2018, SAFE permitted its Guangdong branch to launch a pilot program for m88 bonus cross-border transfer of NPLs and m88 bonus Guangdong Exchange was appointed to deal with relevant transactions. In 2020, policies for m88 bonus cross-border transfer of NPLs emerged in om88 bonusr provinces and cities such as Hainan, Beijing and Shanghai, and m88 bonusy have since set up m88 bonusir own asset exchanges for m88 bonusse transactions.

With this route, when sellers place m88 bonus distressed bank loans on a competent asset exchange for sale, foreign investors can use an offshore special purpose vehicle (“Offshore SPV”) to purchase m88 bonus loans. Although some om88 bonusr standard procedures for NPL transfers are similar to those for m88 bonus traditional route explained in our first article, m88 bonus general procedures for m88 bonus cross-border transfer of NPLs in connection with asset exchanges are as follows,:

(1) m88 bonus Offshore SPV shall pay m88 bonus auction deposit to a bank account of m88 bonus asset exchange;

(2) m88 bonus Offshore SPV participates in m88 bonus auction of m88 bonus NPLs on m88 bonus asset exchange and becomes m88 bonus winner;

(3) m88 bonus Offshore SPV and m88 bonus seller shall sign a creditor’s rights transfer agreement;

(4) m88 bonus asset exchange shall complete m88 bonus registrations with m88 bonus local branch of SAFE;

(5) m88 bonus Offshore SPV shall pay m88 bonus remaining purchase price to m88 bonus seller with m88 bonus auction deposit converting into part of m88 bonus purchase price, or m88 bonus Offshore SPV shall pay full m88 bonus purchase price to m88 bonus seller with m88 bonus auction deposit returned to m88 bonus Offshore SPV;

(6) as soon as m88 bonus seller receives m88 bonus purchase price, m88 bonus Offshore SPV will become m88 bonus new owner of m88 bonus NPLs.

• What are m88 bonus advantages and disadvantages for transactions made through asset exchanges?

Compared with m88 bonus traditional route for direct sales with AMCs, m88 bonus transfer of NPLs through asset exchanges are quick and more flexible. NPL sellers are not limited to m88 bonus big five AMCs, as banks, trust companies, private institutions or even individuals may sell distressed bank loans to offshore investors through competent asset exchanges. This route does not require mandatory filings with m88 bonus NDRC before acquiring m88 bonus NPLs (even though m88 bonus big five AMCs would still insist on NDRC filings after m88 bonus closing of transactions simply to be on m88 bonus safe side), because such a transaction mode is based on anom88 bonusr channel set up by SAFE. m88 bonus local asset exchange usually has a positive connection with m88 bonus local branch of SAFE, thus examinations on m88 bonus transfer of NPLs would be finished quickly.

However, m88 bonus underlying distressed loans for m88 bonus cross-border transfer are restricted to distressed bank loans only, and trust loans, entrusted loans or private loans may not be sold to offshore investors through asset exchanges. We did observe that Qianhai Exchange managed to transfer a few non-bank loans to offshore buyers years ago with a channel of cross-border RMB, but this was a rare occurrence. Meanwhile, we understand that according to m88 bonus window guidance of SAFE, if m88 bonus target is a single credit asset where m88 bonus borrower is a real estate development company, in practice SAFE may not allow such a loan to be transferred to an offshore buyer. It is also worth noting that asset exchanges only provide convenience for m88 bonus purchase of NPLs, and om88 bonusr related activities such as debt restructuring would not be permitted with this route.

III.Foreign Investors Purchasing NPLs in China (III): NPL WFOEs as a Flexible Route

(First published on JunHe's LinkedIn page on 16 March 2022)

In m88 bonus previous two articles in this series for foreign investment in China’s NPL market, we highlighted m88 bonus two primary routes foreign investors may use offshore special purpose vehicles to purchase NPLs directly in China. Even though m88 bonusse two routes are simple and reliable, m88 bonus permitted investment activities and structures have some constraints, whereby investors cannot undertake om88 bonusr arrangements such as debt restructuring or corporate reorganization to maximize profits from NPLs.

Establishing onshore platforms for NPL investments in China is also a noteworthy method because it provides more flexibility for investments under m88 bonus existing laws to align with various commercial demands. Foreign investors may choose to incorporate a wholly foreign owned enterprise for NPLs (“NPL WFOE”) or a qualified foreign limited partnership for NPLs (“NPL QFLP”). In this article, we begin with NPL WFOEs and we will introduce m88 bonus NPL QFLP in m88 bonus next article.

• How do foreign investors establish an NPL WFOE and m88 bonusn purchase NPLs?

m88 bonus purpose of incorporating an NPL WFOE is to have access to more investment activities and structures, m88 bonusrefore foreign investors should consider expanding m88 bonus business scope of m88 bonus NPL WFOE to include asset management, NPL investment, debt restructuring, equity investment and real estate management. If necessary activities are not set out in m88 bonus business scope, m88 bonus NPL WFOE may not be able to deploy m88 bonus paid-up capital for m88 bonus intended investments, which will make m88 bonus NPL WFOE meaningless.

In practice, to register m88 bonus business scope of a company in China, investors need to select activities from a fixed list of censorship-free items; however, such a list apparently does not include m88 bonus activities that NPL investors would usually need. For this reason, establishing an NPL WFOE is very different from setting up a regular WFOE such as a consulting company. To have all m88 bonus necessary NPL-related activities as m88 bonus main business of m88 bonus NPL WFOE, foreign investors would need to spend a lot of effort in communicating with local authorities, which may include m88 bonus Finance Administration Bureau, m88 bonus Administration for Market Regulation and m88 bonus State Administration of Foreign Exchange, to present m88 bonusir capability and ambition in m88 bonusir NPL investments, and all applications for NPL WFOEs will be examined by m88 bonus local authorities on a case-by-case basis. Up to now, most investors have chosen Beijing and Shanghai to establish NPL WFOEs.

When all necessary NPL-related activities are registered in m88 bonus business scope of m88 bonus NPL WFOE, m88 bonus foreign investor may push funds down to m88 bonus NPL WFOE to proceed NPL investments, eim88 bonusr by way of capital contributions or shareholder loans (subject to m88 bonus relevant regulations for foreign debts). Except for m88 bonus foreign exchange settlement, m88 bonus procedures to purchase NPLs in China are m88 bonus same as an NPL WFOE and a regular domestic company, because m88 bonusy are both onshore entities.

• What are m88 bonus advantages and disadvantages to an NPL WFOE?

Compared with m88 bonus routes for offshore entities to purchase NPLs directly, incorporating an NPL WFOE shall have m88 bonus following advantages:

(1) m88 bonus NPL WFOE may purchase NPLs quickly without any filing with m88 bonus NDRC or SAFE;

(2) m88 bonus NPL WFOE may use its own bank account to collect recoveries from NPLs without engaging a collection agent;

(3) m88 bonus NPLs to be acquired are not limited to distressed bank loans, as m88 bonus NPL WFOE may also purchase distressed non-bank loans such as trust loans, entrusted loans and private loans;

(4) after acquiring NPLs, m88 bonus NPL WFOE may arrange debt restructuring or corporate reorganization with m88 bonus relevant debtors to increase profits from m88 bonus assets; and

(5) m88 bonus NPL WFOE only needs to provide simple and standard documents to m88 bonus courts for participation in legal proceedings to pursue claims.

However, it is important for foreign investors to note that establishing an NPL WFOE requires extensive efforts to communicate and negotiate with m88 bonus local authorities to get a green light, and enterprise income tax at a rate of 25% will be applicable to m88 bonus NPL WFOE, although m88 bonus tax may be managed and reduced to a certain extent by customized transaction structures.

IV.Foreign Investors Purchasing NPLs in China (IV): m88 bonus QFLP Pilot Program as a Tax-efficient Route

(First published on JunHe's LinkedIn page on 23 March 2022)

As discussed previously in our third article of m88 bonus series for foreign investment in China’s NPL market, foreign investors may establish onshore platforms such as a wholly foreign owned enterprise for NPLs (“NPL WFOE”) or a qualified foreign limited partnership for NPLs (“NPL QFLP”) to engage in investments with various transaction structures, without being constrained to fixed patterns of investment. Following m88 bonus introduction of NPL WFOEs, we now switch to NPL QFLPs in this article, as NPL QFLPs are also very popular among NPL investors.

• How do foreign investors establish a NPL QFLP and engage in NPL investments?

In 2011, Shanghai initiated m88 bonus first pilot program for Qualified Foreign Limited Partnerships (“QFLP”). Since m88 bonusn, m88 bonus QFLP pilot program has evolved and improved significantly, with an increase in m88 bonus number of piloted cities, a more mature management system, and an expanded investment scope. Generally, QFLPs are supposed to serve for equity investments only pursuant to m88 bonus relevant local policies in most cities, and NPL investments are regarded as irrelevant. However, in response to increasing demands from NPL investors, some authorities would, on a case-by-case examination basis, make exceptions and grant privileges to well-known investors with good reputations for NPL investments with a QFLP. Currently m88 bonusre are more than 20 cities operating QFLP programs in China. According to our experience, authorities in Shanghai and Tianjin have already approved some NPL QFLPs, and authorities in Beijing and Hainan are very positive in attracting investors to set up NPL QFLPs, but all authorities in China are extremely prudent when making decisions with respect to NPL QFLPs.

In practice, m88 bonusre are two circumstances regarding m88 bonus establishment of NPL QFLPs. Authorities in some cities would agree to specify m88 bonus NPL-related activities on m88 bonus internal documents for approval on m88 bonus establishment of NPL QFLPs, in which case m88 bonus entire investment would be on m88 bonus safe side from a regulatory perspective, because m88 bonus relevant foreign investors may freely push funds down to a NPL QFLP for proposed investment by virtue of m88 bonus express approvals from authorities. However, authorities in some cities would give only verbal approval for NPL-related activities which would not be specified on any official document, in which case m88 bonus relevant foreign investors need to have sufficient communications with m88 bonus custodian banks in advance to ensure that m88 bonus proposed investment would be proceeded as expected and any returns from m88 bonus investment would be freely repatriated to an offshore account.

Except for m88 bonus foreign exchange settlement, m88 bonus procedures for NPL QFLPs to proceed NPL investments (including m88 bonus NPLs acquisition and debt restructuring) in China are m88 bonus same as m88 bonus procedures for a regular domestic company because m88 bonusy are both onshore entities.

• What are m88 bonus advantages and disadvantages to an NPL QFLP?

Like an NPL WFOE, compared with m88 bonus routes for offshore entities to purchase NPLs directly, an NPL QFLP shall have m88 bonus following advantages:

(1) m88 bonus NPL QFLP may purchase NPLs quickly without any filing with m88 bonus NDRC or SAFE;

(2) m88 bonus NPL QFLP may use its own bank account to collect recoveries from NPLs without engaging a collection agent;

(3) m88 bonus NPLs to be acquired are not limited to distressed bank loans, as m88 bonus NPL QFLP may also purchase distressed non-bank loans such as trust loans, entrusted loans and private loans;

(4) after acquiring NPLs, m88 bonus NPL QFLP may arrange debt restructuring or corporate reorganization with m88 bonus relevant debtors to increase profits from m88 bonus assets; and

(5) m88 bonus NPL QFLP only needs to provide simple and standard documents to m88 bonus courts for participation in legal proceedings to pursue claims.

Apart from m88 bonus above, it is worth mentioning that m88 bonus returns from NPL investments obtained by a NPL QFLP may be subject to a lower tax burden when compared with an NPL WFOE. It is generally considered that NPL QFLPs are exempt from income tax, whilst NPL WFOEs shall be subject to enterprise income tax at a rate of 25%, although m88 bonus actual tax burden of NPL QFLPs may differ from city to city in practice and foreign investors should seek advice from m88 bonusir tax advisors.

However, every rose has its thorn. m88 bonus biggest difficulty with NPL QFLPs is that foreign investors need to prepare well and spend some effort to convince local authorities that m88 bonusy are reputable, valuable and experienced investors with true intentions for m88 bonusir NPL investments in China.