On August 11, 2007, the Chinese Banking Regulatory Commission (“CBRC”) promulgated the Guidelines on Syndicated Loans (the “Guidelines”). For the first time, a framework has been established for financial institutions to provide syndication loans. The Guidelines prescribe the rights and obligations of a syndication member, lead arranger, facility agent and security agent, the process of syndication, terms of a facility agreement, management of syndication and fee arrangements.
While the rights and obligations of the lead arranger, the facility agent and the security agent are generally consistent with the international practice, the Guidelines set forth minimum and maximum commitment requirements for the sole lead arranger. The sole lead arranger’s commitment should be no less than 20% of the total commitment of the syndicated loan and the percentage allocated to other members of the syndication should be no less than 50% in principle. The Guidelines also prescribe different steps of the syndication process, including, among others, engagement of experts, due diligence, negotiation of term sheets and preparation of information memoranda. During the term of the syndicated loan, the syndication members must have regular meetings to discuss material issues. Financial institutions are entitled to receive an arrangement fee, a commitment fee, an agency fee and reimbursement of expenses in connection with the syndication.
Compared with the Provisional Measures on Syndicated Loans promulgated by the People’s Bank of China in 1997 (the “Measures”), the Guidelines recognize the current business reality and aim to reflect the international standard. For example, in the Measures, one of the goals is to improve the service for major state-owned enterprises, which goal does not show up in the Guidelines. In addition, under the Measures, the banks are not allowed to charge a borrower any fee or expense other than the interests, which are inconsistent with the international practice and revised in the Guidelines. With respect to the terms of a facility agreement, unlike the Guidelines, the Measures do not expressly describe certain key provisions, like representations and warranties and covenants.
A healthy and active credit market is critical for China’s continuing development. With promulgation of the Guidelines and participation of syndication by experienced foreign banks (through their branches), Chinese banks are presented the opportunity to improve their financial services, credit models and risk management. The Guidelines should also facilitate the leveraged investments by private equity firms and strategic investors in China.