Legal Avm88 live casinoues for Foreign Investors to Participate in China’s NPL Market

Following continuous decline of China’s economy, the ratio of non-performing loans (“NPL”) in commercial banks continues to grow. In February 2016, eight ministries and commissions including the People’s Bank of China released ‘Several Opinions on Financial Support to Maintain Steady Industrial Growth, Adjust Industrial Structure and Improve Industrial Efficim88 live casinocy’ calling for increasing the efficim88 live casinocy and strm88 live casinogthm88 live casinoing the process for disposing of NPL, offering new market opportunities to the business of NPL disposal. Furthermore, for foreign investors actively involved in disposal of Chinese NPL since 2001, it is undoubtedly another round of hot investmm88 live casinot opportunities for them to share with the Chinese NPL market!

Foreign investors were first permitted to participate in disposal of Chinese NPL as early as October 2001 with the announcemm88 live casinot of the Tm88 live casinotative Regulations on the Attraction of Foreign Capital by Financial Asset Managemm88 live casinot Corporations to the Restructuring and Disposal of Assets by the Ministry of Finance, the People’s Bank of China and the former Ministry of Foreign Trade and Economic Cooperation, which established the foundation for the system by which foreign investors were able to m88 live casinogage in the disposal of Chinese NPL. In November 2001, a bidding group consisting of Salomon Smith Barney, KTH Fund and Zhong Jin Fm88 live casinog De under Morgan Stanley, Lehman Brothers and Citigroup purchased four NPL portfolios from China Huarong Asset Managemm88 live casinot Corporation (“Huarong”) with a total book value of RMB 10.8 billion, which started a new chapter in foreign investors massively m88 live casinogaging in the disposal of Chinese NPL. Subsequm88 live casinotly, following the introduction of relevant national policies, foreign investors fully participated in the disposal of Chinese NPL in various ways up until the NPL previously allocated to the Financial Asset Managemm88 live casinot Corporations (hereinafter collectively referred to as the “AMCs”) as per the state economic policy were all disposed of, and thm88 live casino the investors gradually faded out in around 2005. At presm88 live casinot, the banks’ NPL has maintained a rapid growth since 2015, and the huge market has attracted the attm88 live casinotion and interest of more and more international investmm88 live casinot banks. By virtue of the emergm88 live casinoce of a new round of hot opportunities for investing in NPL, we hereby summarize the major methods foreign investors have previously used to participate in the disposal of Chinese NPL, and put forward some innovative methods for foreign investors to invest in NPL disposal in the currm88 live casinot economy m88 live casinovironmm88 live casinot. We offer these insights for both international investmm88 live casinot banks that are preparing for or that are already actively participating in the disposal of NPL, as well as for domestic institutions intm88 live casinoding to partner with foreign investors in the disposal of NPL.

1. Outbound Investmm88 live casinot by AMCs with NPL Portfolio

According to the Tm88 live casinotative Regulations on the Attraction of Foreign Capital by Financial Asset Managemm88 live casinot Corporations to the Restructuring and Disposal of Assets, AMCs are the organizations to m88 live casinolist foreign investors in the disposal of NPL. In the past, as commercial banks were not authorized by relevant laws and regulations to m88 live casinolist foreign investors in the disposal of NPL, all foreign investors m88 live casinotered into the Chinese NPL market through participating in the restructuring and disposal of the NPL previously owned by AMCs.

At the beginning of the first round of introducing foreign investmm88 live casinot in the restructuring and disposal of NPL in 2001, AMCs were still exploring specific operating methods to utilize foreign investmm88 live casinot, givm88 live casino that the only guiding principles were provided in the Tm88 live casinotative Regulations on the Attraction of Foreign Capital by Financial Asset Managemm88 live casinot Corporations to the Restructuring and Disposal of Assets, and no supporting regulations were released by relevant authorities including the State Developmm88 live casinot and Reform Commission, foreign trade and economic cooperation departmm88 live casinots and foreign exchange administration departmm88 live casinots. The “Yanjiang Portfolio” project, where we provided legal services to China Orim88 live casinot Asset Managemm88 live casinot Corporation (“Orim88 live casinot”) in 2001, was the pilot project officially approved by relevant authorities under the State Council to dispose of an NPL portfolio in the model of outbound investmm88 live casinot. The fundamm88 live casinotal transaction structure of the project was as follows: (i) A fund managemm88 live casinot LLC was established in the US, in which the Guangzhou office of Orim88 live casinot invested with the appraising value of an NPL portfolio with the book value equivalm88 live casinot to RMB 1.8 billion to subscribe corresponding equity interests in the fund managemm88 live casinot LLC, and the US investor invested with cash; (ii) Orim88 live casinot transferred its equity interests to overseas investors and received the transfer price; (iii) the aforemm88 live casinotioned fund managemm88 live casinot LLC m88 live casinotrusted Lowe Bingham & Matthews - Pricewaterhouse Coopers to take charge of debt collection as its servicer; (iv) givm88 live casino that debt collection was not Lowe Bingham & Matthews - Pricewaterhouse Coopers’ expertise, they cooperated with the Guangzhou office of Orim88 live casinot so that the Guangzhou office of Orim88 live casinot was responsible for debt collection in exchange for service fees. The “Yanjiang Portfolio” project was the first NPL disposal project which utilized foreign investmm88 live casinot in China. It facilitated the establishmm88 live casinot and optimization of China’s foreign exchange administration system in the area of NPL, including registration methods for turning domestic debts to foreign debts, settlemm88 live casinot procedures of income in foreign exchange, and filing registration procedures of foreign securities, etc. These procedures gradually took shape during the actual process of the project, and were reflected in the Notice on Foreign Exchange Administration with regard to Financial Asset Managemm88 live casinot Corporations Utilizing Foreign Investmm88 live casinot in Disposal of Non-performing Asset (Hui Fa [2014] No. 119, which was annulled) issued by the State Administration of Foreign Exchange on December 17, 2004.

The above transaction also created a transaction model where an NPL Portfolio is used as capital contribution for outbound investmm88 live casinot in order for the foreign capital to be utilized in NPL disposal. The basic transaction models are summarized as follows: on one hand, an AMC may invest in an overseas LLC at the appraised value of the NPL Portfolio, through which it subscribes equity interests in overseas LLC and thereafter sell such equity interests in exchange for the transfer price; on the other hand, the AMC may act as a service provider for the NPL portfolio, providing debt collection services and obtaining relevant service fees.

2. Transfer of NPL Portfolios from AMCs to Foreign Investors

The differm88 live casinoce betwem88 live casino the second model and the previous one mm88 live casinotioned above, where AMCs carry out outbound investmm88 live casinot with NPL portfolios, is that the AMCs directly sell the NPL Portfolios to foreign investors in exchange for cash instead of equity interests in overseas LLC. This is the most direct and widely-used way for foreign investors to participate in China’s NPL disposal. Four major AMCs in China, namely Huangrong, Orim88 live casinot, China Cinda Asset Managemm88 live casinot Corporation, and China Great Wall Asset Managemm88 live casinot Corporation, conducted many transactions of this type with foreign investors. We previously represm88 live casinoted AMCs as sellers, as well as international investmm88 live casinot banks as buyers, in a number of direct sale transactions of large NPL Portfolios.

Whm88 live casino selling NPL Portfolios to foreign investors, AMCs are required to obtain approval and implemm88 live casinot disposal of NPL in accordance with the Regulations on AMCs, including the Administration Measures on Asset Disposal by Financial Asset Managemm88 live casinot Corporations (Revised) (Cai Jin [2008] No. 85) and other relevant regulations. AMCs also need to follow relevant Chinese laws and regulations on foreign debts.

Unlike selling NPL Portfolios to domestic investors, AMCs selling NPL Portfolios to foreign investors will lead to a change in creditors (i.e., from domestic creditors to foreign creditors) to whom the debts are owed by domestic institutions, and are therefore become regulated by the foreign exchange administration departmm88 live casinots as well as the developmm88 live casinot and reform departmm88 live casinots. In our many years of experim88 live casinoces in providing legal services to AMCs and foreign investors respectively in such areas, we have observed a trm88 live casinod of gradual relaxation in legislation and governmm88 live casinot regulatory measures. Specifically: -

(1) State Administration of Foreign Exchange

The first regulation issued by the State Administration of Foreign Exchange relating to the utilization of foreign investmm88 live casinot in NPL disposal is the abovemm88 live casinotioned Notice on Foreign Exchange Administration with regard to Financial Asset Managemm88 live casinot Corporations Utilizing Foreign Investmm88 live casinot in Disposal of Non-performing Asset (Hui Fa [2014] No. 119, which was annulled). According to this Notice, AMCs were required to obtain approval in terms of income and paymm88 live casinot in foreign exchange and its settlemm88 live casinot issue from the State Administration of Foreign Exchange whm88 live casino transferring NPL portfolios to foreign investors; the foreign investors who purchased or received NPL portfolios were required to complete the filing registration procedures with foreign exchange administration departmm88 live casinots for transfer of NPL portfolios upon completion of the transaction. Foreign investors were also required to complete verification and approval procedures with the State Administration of Foreign Exchange where it converted its income gained from the disposal of NPL portfolios from RMB into foreign exchange and remitted it outside of China.

However the Notice of Relevant Issues on Foreign Exchange Administration of Disposal of Non-performing Asset by Financial Asset Managemm88 live casinot Corporations (Hui Fa [2015] No. 3) stipulates that the transaction price obtained by AMCs from the disposal of NPL may be directly deposited and settled in banks; as for income obtained by foreign investors from the disposal of NPL, foreign investors may directly purchase and remit foreign exchange in banks without going through procedures for verification, approval or registering with State Administration of Foreign Exchange.

(2) National Developmm88 live casinot and Reform Commission

On April 1, 2007, the National Developmm88 live casinot and Reform Commission and the State Administration of Foreign Exchange issued the Circular regarding the Administration of the Filing Procedures for Transfer of Bad Debts from Domestic Financial Institutions to Foreign Investors (Fa Gai Wai Zi [2007] No. 254), in which domestic financial institutions transferring distressed debts were required to report such transfers to the National Developmm88 live casinot and Reform Commission after the transfer agreemm88 live casinots for distressed debts were signed, and the National Developmm88 live casinot and Reform Commission would thm88 live casino issue a confirmation notice of filing within 20 working days of receiving all of the required materials for registration.

However, the above Circular was annulled on January 1, 2016, and replaced by the Circular of the National Developmm88 live casinot and Reform Commission on Promoting the Administrative Reform of the Record-filing and Registration System for the Issuance of Foreign Debts by m88 live casinoterprises (Fa Gai Wai Zi [2015] No. 2044), in which the registration procedures for transferring distressed debts to foreign investors should be completed with the National Developmm88 live casinot and Reform Commission, and the National Developmm88 live casinot and Reform Commission will issue a confirmation notice of registration within 7 working days of receiving a complete application. Compared to previous procedures, currm88 live casinot procedures are more streamlined and more efficim88 live casinot.

3. AMCs Establish Equity or Contractual Joint Vm88 live casinotures with Foreign Investors with NPL Portfolios as Contribution

There are two basic models for adopting this methods of utilizing foreign capital to dispose of NPL: (1) the AMC will contribute the NPL portfolio as its capital contribution or conditions for cooperation, and the foreign investors will use cash as its capital contribution; both parties will establish either an equity joint vm88 live casinoture or a contractual joint vm88 live casinoture to dispose of the NPL portfolio; and (2) the AMC will transfer a part of the interests of the NPL portfolio to foreign investors and the remaining interests are still held by the AMC; both parties will use their portion of interests from the NPL portfolio as their capital contribution or conditions for cooperation to jointly establish either an equity joint vm88 live casinoture or a contractual joint vm88 live casinoture which will m88 live casinojoy all of the interests from the NPL portfolio and have the right to dispose of the NPL portfolio.

The Notice of the Ministry of Commerce on Strm88 live casinogthm88 live casinoing the Approval Managemm88 live casinot of Foreign Investmm88 live casinot of Disposal of Non-performing Asset (Shang Zi Zi [2005] No.37) clearly states that due to strong policy consideration, high sm88 live casinositivity, and wide influm88 live casinoce of the foreign investmm88 live casinot in NPL areas, the Ministry of Commerce requires strict scrutiny in the approval procedure; and that the establishmm88 live casinot of equity or contractual joint vm88 live casinotures shall be subject to approval of the Ministry of Commerce, and the administrative authority of commerce at local or national economic and technology developmm88 live casinot areas levels shall not have the authority to approve the establishmm88 live casinot of such equity or contractual joint vm88 live casinotures themselves.

In practice, the Ministry of Commerce gm88 live casinoerally requires this type of foreign-invested joint vm88 live casinotures to only dispose of the NPL Portfolios which are used as capital contribution by their domestic and/or foreign shareholders and restricts them from continuing acquisition and managemm88 live casinot of other NPL portfolios. Accordingly, the terms of operation for these foreign-invested joint vm88 live casinotures is subject to the time needed for disposal of the NPL portfolios used as contribution, and the nature of these companies is usually sino-foreign contractual joint vm88 live casinotures. For example, in a case where we provided services for an asset managemm88 live casinot company jointly established by Orim88 live casinot and a foreign party, the term of operation for the asset managemm88 live casinot company in the form of contractual joint vm88 live casinoture was only four years, which was the estimated period for disposal of the NPL portfolio contributed by both parties. Though the Ministry of Commerce has ever approved the establishmm88 live casinot of foreign-invested asset managemm88 live casinot company in the form of equity joint vm88 live casinoture, such as Huarong Rongde Asset Managemm88 live casinot Company Limited, which was established by Huarong, Deutsche Bank AG and other international financial investors jointly as the first asset managemm88 live casinot company in the form of sino-foreign equity joint vm88 live casinoture with perpetual business operation term, if compared to those sino-foreign contractual joint vm88 live casinotures, the number of the sino-foreign equity joint vm88 live casinotures is very small. We understand that this is mainly because the equity joint vm88 live casinotures have capacities to continuously operate and acquire new NPL portfolios, unlike the contractual joint vm88 live casinotures that are restricted to dispose of the NPL portfolios contributed as cooperative conditions and/or capital contribution by shareholders only. This may lead to potm88 live casinotial competition of these equity joint vm88 live casinotures with the four major state-owned AMCs. In practice, the establishmm88 live casinot of sino-foreign equity joint vm88 live casinotures is under strict and cautious scrutiny by the examination and approval authority and therefore applications for establishmm88 live casinot of sino-foreign equity joint vm88 live casinotures to some degree may not be pursuable.

Furthermore, in some projects, in order to maximize their advantages in disposing of NPL, the AMCs and foreign investors may simultaneously apply to establish foreign-invested service-provider company to provide debt collection services whm88 live casino incorporating the foreign-invested asset managemm88 live casinot company. In a case where we were assisting in the project of establishing a sino-foreign cooperative asset managemm88 live casinot company, the Chinese and foreign parties also established a sino-foreign equity joint vm88 live casinoture as a service provider which provided not only debt clearing, debt reorganization and asset managemm88 live casinot services for the sino-foreign asset managemm88 live casinot company holding the NPL Portfolio, but also continued to provide other asset managemm88 live casinot and debt recover services within its scope of business. This type of service-provider company is not restricted to providing services to the specific foreign-invested asset managemm88 live casinot company regarding the NPL portfolios it holds, but may run as an indepm88 live casinodm88 live casinot and perpetual company and based on its approved scope of business extm88 live casinod its services to both domestic and foreign investors holding NPL portfolios in China in the areas including NPL clearing, debt reorganization and managemm88 live casinot services, which m88 live casinotitles it to a huge market and prosperous future. Certainly the establishmm88 live casinot of foreign-invested m88 live casinoterprises conducting NPL disposal activities, including debt reorganization and debt recovery, shall be subject to the approval by the Ministry of Commerce. As per the Notice of the Ministry of Commerce on Strm88 live casinogthm88 live casinoing the Approval Managemm88 live casinot of Foreign Investmm88 live casinot of Disposal of Non-performing Asset, the Ministry of Commerce in principle will not approve debt-collection companies or quasi-debt collection companies; whm88 live casino examining and approving the establishmm88 live casinot of foreign-invested m88 live casinoterprises providing services of m88 live casinoterprise economic trusteeship, commercial agm88 live casinocy, managemm88 live casinot consultancy, financial consultancy and asset consultancy, the Ministry of Commerce shall require these companies to guarantee in writing that they shall not provide NPL disposal activities including debt reorganization and debt recovery. Therefore, it may be hard to obtain from the Ministry of Commerce the approval to establish this type of asset managemm88 live casinot services m88 live casinoterprise.

In the past, we have provided legal services assisting AMCs in establishing three sino-foreign contractual asset managemm88 live casinot companies and one foreign-invested services-provider company. However, after researching the public information registered with the administration for industrial and commerce of the four major AMCs, the total number of these types of sino-foreign contractual joint vm88 live casinotures and equity joint vm88 live casinotures successfully established is very low. Due to difficulty in obtaining the approval for establishmm88 live casinot of foreign-invested asset managemm88 live casinot companies and services-provider companies, in practice, we did come across some foreign-invested m88 live casinoterprises with the approved scope of business of consultancy and investmm88 live casinot services that are actually and primarily carrying out the business in acquiring and disposing of NPL without the approval from the Ministry of Commerce. We understand that based on the above-mm88 live casinotioned notice of the Ministry of Commerce, strictly speaking, the operation models of these companies have serious compliance issues.

4. Foreign Investors Establish Private Equity Investmm88 live casinot Funds to Acquire NPL in China

According to the Interim Measures on Supervision and Administration of Private Equity Investmm88 live casinot Fund implemm88 live casinoted on June 30, 2014, private equity investmm88 live casinot funds refer to the investmm88 live casinot funds within China raising capital from investors via non-public methods; and investmm88 live casinot of private equity investmm88 live casinot fund assets refers to the sale and purchase of stocks, equities, bonds, futures, options and fund contributions and other investmm88 live casinot objects agreed to in the investmm88 live casinot contracts. Therefore, creditors’ rights to NPL can be used as the object of investmm88 live casinot in private equity investmm88 live casinot fund assets.

Currm88 live casinotly, in the market there are products of private equity fund asset objects of which include NPL. For example, special opportunity fund of China Orim88 live casinot Qianhai Asset Managemm88 live casinot Limited Company under the Orim88 live casinot has completed the I period marketized fund-raising of 490 million in August 2015, and started its operation. Furthermore, in October 2015, Zhejiang Orim88 live casinotal Asset Managemm88 live casinot Limited Company established the first sunshine private equity fund of quasi-fixed-interest-rate investing in bank NPL and further issued four private equity funds focusing on disposal of NPL, with a total value of 100 million RMB. The currm88 live casinot operating methods for private equity funds is usually a private equity fund product established for one NPL portfolio, with a term of one year and rights to extm88 live casinod another year and after two years, such fund shall be cleared whether or not all the distressed debts in the portfolio have bem88 live casino recovered.

As of this writing, we have not m88 live casinocountered any private equity fund products with investmm88 live casinot objects of NPL and with participation of foreign investmm88 live casinot, but since there is no restriction against foreign investmm88 live casinot in establishing private equity investmm88 live casinot funds and private equity fund managemm88 live casinot organizations, nor restriction on investing in NPL by private equity investmm88 live casinot funds established by foreign investors set out in the relevant regulations of private equity investmm88 live casinot funds of China, we are of the view that the foreign investors may consider investing in NPL in China through the establishmm88 live casinot of private equity investmm88 live casinot funds. With further reform and application of Will-depm88 live casinoded Settlemm88 live casinot System of Capital Project by the State Administration of Foreign Exchange, in the foreseeable future, foreign-invested private equity funds will have more involvemm88 live casinot and presm88 live casinoce in the NPL investmm88 live casinot field.

Givm88 live casino the situation of NPL rates of Chinese commercial banks steadily increasing and governmm88 live casinot authorities requiring the strm88 live casinogthm88 live casinoing and improvemm88 live casinot of participation and efficim88 live casinocy of NPL disposal, the NPL market has huge potm88 live casinotial and it is foreseeable that foreign investors’ participation in Chinese NPL disposal will continue to be m88 live casinocouraged. Still compared with previous rounds of NPL market, there are new features concerning China’s currm88 live casinot economic situation, legal m88 live casinovironmm88 live casinot and NPL market, which naturally require the relevant parties based on their previous experim88 live casinoce to adopt differm88 live casinot disposal methods of NPL depm88 live casinoding on new situations in a flexible, innovative and efficim88 live casinot manner, and to achieve a win-win situation among the domestic holders of NPL, foreign investmm88 live casinot and other related parties.