On October 12th, 2012, the China Insurance Regulatory Commission (CIRC), China’s insurance industry regulator, promulgated and implemented the “Interim Administrative Rules for Infrastructure Debt Investment Plans” (CIRC Order No.92 2012) (the Interim Rules). These Interim Rules replace the “Establishment of Infrastructure Debt Investment Plan Products” (the Guidelines).

Overall, the Interim Rules provide detailed rules on the standards that Chinese insurance institutions must meet in order to be eligible to invest their insurance funds in infrastructure debt projects, and they also establish the procedures that insurance institutions must complete in order to create a debt investment plan.

In comparison to the Guidelines, the Interim Rules relax some of the standards that insurance institutions have to meet in order to invest in infrastructure debt investment plans. We believe the goal of relaxing the standards is to increase the development of the Chinese infrastructure debt investment market by increasing the number of investment opportunities that exist, and enlarging the pool of investors that can invest in infrastructure debt investments. The following are the primary differences between the Interim Rules and the Guidelines.

“Registration with the CIRC” has been changed to “Record/Register with the related Organization”

The Guidelines established that when an insurance asset management company (IAMC) created an infrastructure debt investment plan, it had to register that plan with the CIRC. In practice, the CIRC actually required that IAMCs seek the CIRC’s approval for a debt investment plan prior to actually creating the plan, thereby, every plan that the CIRC said it would allow was created, and any that it said it would not allow were not. Thus, in essence, there really was a standard where the CIRC required prior approval, even though the Guidelines only actually required registration after creation.

However, the newly promulgated Interim Rules no longer require that debt investment plans be registered with the CIRC, instead they require an IAMC that intends on creating a debt investment plan to submit information about the potential debt investment plan to a “designated organization” so that this “designated organization” can register or record that the IAMC will establish the plan, and then once the plan has been created it can be issued and traded through an eligible “financial asset trade center.” The Interim Rules establish that the “designated organization” is responsible for providing the CIRC information on the debt investment plan. Therefore, an IAMC does not have any CIRC application or registration obligations; all of the obligations to the CIRC fall on the “designated organization.” However, since the CIRC promulgated the Interim Rules it is responsible for determining what entity will be the “designated organization.” Yet, that entity is not named in the Interim Rules, and at present, the CIRC has not clearly stated what that entity is in any of its other rules or regulations.

Conditions the debtor seeking financing must meet

In comparison with the Guidelines, the Interim Rules changed the conditions the debtor must meet in order to have its debt financed with investments from insurance funds. First, the Interim Rules no longer require the debtor to be a listed company, a controlling shareholder of a listed company, or a large national enterprise or group company like the Guidelines did. Instead, the Interim Rules establish that a debtor only needs to be a company that is duly registered with the Chinese government registration authority.

Second, the Interim Rules no longer require the debtor to have been profitable for 2 consecutive years prior to financing the infrastructure project, and they no longer require the debtor to have been operating for a minimum of 3 years. Instead, the Interim Rules use more subjective standards. For instance, they state that debtors are required to have the ability to continuously operate, have a “bright” development future, have stable and reliable income, and have a good financial status. Therefore, now even if the debtor has not been profitable for two years, or has not existed for a minimum of 3 years, it could still be eligible to have insurance funds invested in the debt of its infrastructure projects.

Finally, the Interim Rules no longer allow the debtor and the IAMC to have affiliated relationships. We believe that this new requirement was specifically put in place to ensure that there is some separation of risk in infrastructure debt projects.

However, even with the changes the Interim Rules made, there are some requirements that are exactly the same as they were in the Guidelines. For instance, all of the following requirements are the same in both the Interim Rules and the Guidelines: a debtor must have a good credit record, it must have no record for violating China’s laws, and it must have a reliable source of income.

Conditions the investment project must meet

The Interim Rules somewhat relaxed the requirements infrastructure debt investment projects must meet in order to be eligible for insurance funds investment. Specifically, the Interim Rules no longer require an investment project to obtain the State Council or an industry related ministry department’s approval to be able to receive insurance funds financing.

Based on the infrastructure debt investment projects that were approved while the Guidelines were in place, it appears that in practice, the State Council or industry related ministry department would only provide a development plan an informal acknowledgement that they accepted a project in principle, but they would not issue formal approval for a project. This lack of a formal approval created a large legal obstacle that these projects had to overcome because the Guidelines standards for the establishment of debt investment plans required projects to have formal approval. However, this problem has been eliminated in the Interim Rules because formal State Council or industry related ministry department approval is no longer necessary for a project to be eligible to create a debt investment plan. Instead, the Interim Rules focus more on whether a project meets the Chinese government’s environmental, industry, land use, and energy savings policy standards, whether a project will have a significant economic and positive social impact on Chinese society, and whether the project was properly set up and developed, it will be constructed in a high quality manner, and whether it is well operated.

Project credit-worthiness requirements

Just like the Guidelines, the Interim Rules create three credit worthiness standards (A type, B type, and C type) for infrastructure projects that wish to have insurance funds finance the projects’ debt.

The Interim Rules establish that an A type credit standard project must be certified by a national special fund, a policy bank, or a commercial bank that has, at least, an AA credit rating, and in order to have A type credit the project must be financed with the full amount of principal and interest and have an unconditional, irrevocable and joint and several liability guarantee for the project. In comparison with the Guidelines standards for A type projects, the Interim Rules only made a slight adjustment by adding the words, “at least AA credit rating” for the commercial bank, which did not exist in the Guidelines.

On the other hand, the C type projects are given that status when a listed company that is building the project has pledged shares in the company that can be freely transferred, the company building the project has pledged its assignable accounts receivable that are derived from the right to charge collection, or the company building the project has offered some of its other assets as security for it to be eligible to have its debt financed by insurance funds.

Under the Guidelines the B type projects were deemed as such when a listed company or the controlling shareholder of a listed company that has net assets of more than RMB 20 billion provided a joint and several liability guarantee for the infrastructure project. However, the Interim Rules expand the types of entities that can provide joint and several liability guarantees to include all companies. In addition, the Interim Rules remove the RMB 20 billion minimum net asset requirement. Instead of a minimum net asset requirement, the Interim Rules allow a project owner’s net assets to be in line with the scale of the overall debt investment plan. In practice, when the Guidelines where in place it was very difficult for an infrastructure debt investment plan project investor to find a national special fund or a bank to provide guarantees for a project, and listed companies and controlling shareholders of listed companies tended to be very hesitant to pledge assets (as is required for a C type project) to a project.

In general, there were few adjustments made to the A type and C type credit worthiness requirements, in turn, there probably will not be a spike in those types of credit worthy projects now that the Interim Rules are in place. Thus, like before, B type projects are probably going to be the most common types of infrastructure debt projects in the Chinese market. The changes the Interim Rules made to the standards for B type projects will probably make it a little easier for these types of projects to be certified. Thus, we tend to believe that the Interim Rules’ more relaxed standards will make it easier for debtors to receive a credit-worthiness determination, which will help the overall development of the Chinese debt investment plan market by increasing the number of investment opportunities.