The repackaging structure has been very popular in the last few years. Chinese financial institutions have used the structure as a tool for facilitating market access and innovative financing solutions for their clients.
One sector where the structure has been widely used is PRC real estate, which experienced a roller coaster ride in 2021. After a strong first half, the sector experienced a sharp downturn in the last quarter of 2021. Market conditions continue to be challenging for this sector in 2022.
Against this backdrop, we have seen arrangers, PRC real estate companies and investors looking to restructure existing repackaging transactions (including by way of early unwind, maturity extension, taking additional security and/or exchange offer). We have also observed increased market interest in asset-backed transactions relating to PRC non-real estate sectors (such as asset leasing and fintech companies).
In this alert, we give insights on how to navigate the complexities in repackaging, examine some of the key issues relating to amending or unwinding repackaging transactions and share our observations on examples and trends. This includes the increasing popularity of innovative asset-backed transactions.
What is the basic structure of a repackaging transaction?
Many of the simpler repackaging transactions are typically structured with the following features:
- An orphan SPV issuer issues notes and uses the issuance proceeds to purchase underlying assets, such as a portfolio of bonds (collateral assets)
- In repackaging transactions arranged by Chinese financial institutions, these structures are often "pass-through". The cashflows under the notes will match the cashflows under the collateral assets precisely without the need for a swap in managing cashflow discrepancies
- If it is necessary to modify the cashflows under the collateral assets for any reason (eg changing the interest rate or currency), the SPV issuer enters into a swap transaction with the swap counterparty (usually the arranger or one of its affiliates), under which the SPV issuer pays to the swap counterparty cashflows it receives from the collateral assets, and the swap counterparty pays to the SPV issuer cashflows which match payments under the notes
- The SPV issuer grants security over the collateral assets it holds as well as all of its rights, title and interest under the swap transaction (if any) and other related transaction documents in favour of the note trustee, and
- The trustee holds the benefit of the security on trust for the secured creditors, which include the noteholders and the swap counterparty.
Repack notes involving real estate companies: Amendments and terminations
A repackaging transaction is more complex than a conventional bond or loan issuance due to the existence of an orphan SPV and collateral in the structure.
How to make amendments
The orphan SPV issuer is usually restricted from making any amendments without the trustee’s consent.
The trustee is usually permitted to give consent in very limited circumstances, such as where the proposed amendments are formal, minor, technical or not materially prejudicial to the noteholders. Trustees are generally conservative about exercising their right to give such consent and will generally err on the side of requiring noteholder consent.
If noteholder consent is required, the repackaging transaction documents will usually require an extraordinary resolution of the noteholders to be passed, either at a meeting of noteholders, or in the form of electronic consent or written resolutions. For repackaging transactions with a small number of noteholders, convening a meeting is rare and such resolutions will usually be passed in the form of electronic consent or written resolution. For written resolutions, trustees will usually require some proof of holding from each noteholder, such as a screenshot from its custodian’s account with the clearing systems.
It is possible to streamline this consent process by incorporating a noteholder representative mechanism at the outset. However, where the noteholder representative only holds a minority of notes, it is important for the noteholder representative to consider the commercial, legal and other implications of unilaterally agreeing to any amendments without the consent of other noteholders.
We have recently advised on multiple restructurings of repackaging transactions involving PRC real estate companies. One common restructuring is a maturity extension coupled with the provision of additional onshore security governed by PRC law.
It is important to consider the structural and legal issues when incorporating PRC law security within a repackaging transaction, including the following:
- Identity of the security taker – Onshore security is usually introduced at the underlying asset level, which can be granted to the SPV issuer (as creditor at the underlying asset level) or a security agent such as the trustee. There are numerous legal, commercial and practical considerations to take into account when structuring the additional onshore security. For example, for certain asset classes (such as real estate), having an onshore security agent may be helpful for purposes of local security registration. If the SPV is to be the security taker of the onshore security, it will need to further grant security over its rights to the trustee. Conflicts of laws issues may be relevant as the further grant of security to the trustee is likely to be governed by an offshore jurisdiction (such as English law).
- Onshore security registration procedures – Generally speaking, onshore security can be created only upon the completion of registration with the relevant registration authority in the PRC. For example, a pledge over unlisted shares of a PRC company must be registered with the local State Administration for Market Regulation (SAMR). Given different local SAMRs may require different application documents for the registration of a pledge, prior consultation with the relevant local SAMR is recommended to ensure a successful registration. In addition, if the onshore security is provided by an onshore security provider to secure the debt owed by an offshore debtor, it would likely constitute a “neibaowaidai” which requires registration with SAFE or its local branch. Failure to complete the SAFE registration would be a major obstacle in remitting funds offshore if onshore security is enforced.
- Notarisation requirements – The application documents for onshore security registration usually include the incorporation documents and relevant corporate approval documents of the offshore security taker. Such documents are often required to be translated into Chinese (if necessary) and notarised in the place of incorporation of the offshore security taker for these documents to be used in the PRC. The translation and notarisation process is often time consuming, and this lead time should be taken into account in the overall transaction timeline.
- Potential issues relating to enforcement of onshore security – If the SPV is the onshore security taker, it is necessary to ensure that the trustee or a disposal agent (usually the arranger or one of its affiliates) can step in to enforce the security on its behalf. The availability of enforcement remedies (whether court-assisted or self-help) will depend on the type of asset and security taken. In addition, as discussed above, if the additional onshore security arrangement constitutes a “neibaowaidai”, it is crucial to complete the SAFE registration for the enforcement proceeds of the onshore security to be remitted offshore in the future.
Many repackaging transactions are terminated by the orphan SPV repurchasing notes from the investors upon consent from all parties. Termination may not always follow the early redemption provisions specified in the transaction documents. In such cases, it is important for parties to consider how to deal with the collateral and any outstanding swap transactions. This is particularly the case where the collateral asset is bespoke and illiquid in nature, such as loans, fund interests or share repurchase undertaking arrangements.
Terminations of repackaging transactions are generally expected to be “bottom-up”, where the underlying collateral is liquidated or unwound such that the SPV is put in funds to repurchase the notes. This often requires an amendment or termination of some or all the underlying collateral documents. Alternatively, where feasible, the underlying collateral can be delivered to the noteholders as consideration for the termination of the transaction.
Structured deals involving non-real estate sectors: Market trends and notable transactions
We continue to see new structured transactions involving non-real estate sectors. These transactions often involve simpler structures with the underlying assets being bonds, equities or fund interests. We have also seen increased interest in credit-linked structures as a way of hedging exposure to certain sectors in the market.
Chinese financial institutions continue to find innovative ways of using the repackaging structure. We recently advised a Chinese financial institution on a complex repackaging transaction over Hong Kong listed shares for the benefit of onshore employees as part of an employee incentive scheme. The structure included various innovative elements which adapted the classic repackaging structure for purposes of a cross border employee incentive scheme via the Qualified Domestic Institutional Investor channel.
We have also been involved in numerous innovative asset-backed transactions. To name a few:
- we advised a fintech originator on the establishment of its inaugural warehourse securitisation facility, which adapted repackaging and securitisation technology to create an asset-backed financing solution for an e-commerce financing platform. For more details, see our press release here.
- we advised the arranger of a limited recourse fixed-rate notes issue backed by charter hire receivables from three container vessels, which were flagged in Panama and Liberia but ultimately owned by one of Asia’s leading leasing companies. This transaction showcased a blend of securitisation and asset finance technology to achieve the desired off-balance sheet treatment for the originator.