In order to implement the Opinions of the State Council on Further Optimizing the Market Environment for Mergers and Acquisitions of Enterprises (Guo Fa No.14 ), and to improve the provision of financial services in relation to merger & acquisition activities, the China Banking Regulatory Commission (“CBRC”) made some amendments to the Guidelines for Risk Management of Merger and Acquisition Loans Granted by Commercial Banks introduced by CBRC in 2008 (the “Old Guidelines”). The amended guidelines (the “New Guidelines”) replaced the Old Guidelines upon their introduction on February 10, 2015. The most notable changes to the Old Guidelines are summarized below:
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In summary, key amendments under the New Guidelines include:
- Broader application: the New Guidelines not only apply to M&A Loans provided by commercial banks, but also apply to M&A Loans provided by policy banks, PRC branches of foreign banks, or finance companies of business groups.
- Extension of the loan term: in recognition of the fact that it takes longer time for an M&A transaction to achieve integration and synergies, the maximum term of an M&A Loan has been extended from 5 years to 7 years.
- Higher leverage ratio: with banking facilities being a major source of funding for M&A transactions, the maximum amount of an M&A Loan has been increased from 50% to 60% of the total funds required to complete the proposed M&A transaction.
- Adjusted security requirements: the New Guidelines have relaxed the requirements on loan security by replacing compulsory rules with more general ones, which no longer require commercial banks to set security terms more stringent than those for other types of loans. On condition that the M&A Loan risks can be eliminated or controlled by the lender, the security structure may now be determined based on the risk profile of the M&A transaction and the credit status of the acquiring party.
- New reporting obligation regarding amount limits: lenders must report to CBRC, or its local bureaus, on the M&A Loan amount limits.
- Mitigation of leverage risks: in evaluating the operational and financial risks of M&A Loans, commercial banks are required to ensure that the equity contribution comprises a reasonable proportion of the funding, so that the risk of a highly-leveraged loan is minimized.
- Protection against fraudulent M&A transactions: through a more stringent process covering due diligence, drawdowns, disbursements and loan administration, lenders are required to prevent related entities from obtaining loans for fraudulent M&A transactions.
- Improved system for gathering statistical data for M&A Loans: lenders are now required to implement the system to compile and analyse information pertinent to M&A Loans, as well as provide statistical analysis of M&A Loans.
We observe that the New Guidelines will bring about increased opportunities for lenders and acquiring parties to enter into M&A Loans. At the same time, there are also heightened requirements for risk assessment and management in connection with M&A Loans.