China Banking Regulatory Commission (CBRC) issued Guidelines on Risk Management of Loans Extended by Commercial Banks for the Purpose of Acquisition (the “Guidelines”) on December, 9th, 2008. The Guidelines overturn a long-standing restriction on the granting of bank loans for equity investments in China. The initiative will expand the financing channels available to Chinese enterprises and is expected to boost both onshore and outbound mergers and acquisitions (M&A) activity.
“Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines. The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.” China Banking Regulatory Commission, December 2008.
Under the Guidelines, a commercial bank is required to establish its loan management procedures and information system for the acquisition loan business based on the principle that such procedures and system for the acquisition loan business must be more stringent than other types of loan business.
CBRC stipulates that the following requirements must be met for banks to be qualified for M&A lending: good risk management and internal control mechanism; adequacy ratio of loan loss provision not less than 100%; capital adequacy ratio not less than 10%; and professional teams on M&A due diligence and credit risk assessment.
The Guidelines point out that commercial banks must require the borrower to provide adequate guarantees, including but not limited to asset-backed, equity pledge, and third-party guarantees and other forms of security in compliance with the law.
The Guidelines are expected to be a boost to the local M&A market and would help domestic companies undertake overseas M&A activities. Industry insiders explain that an M&A loan is similar to a bridge loan, which is used as a short-term transition loan. The issuing of an M&A loan is to promote “small risk to large”. The “snake eating the elephant” approach to M&A transactions contends that once it is backed by funds, is more likely to be successful. However, the actual implementation of the Guidelines remains to be seen.
“Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines. The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.” China Banking Regulatory Commission, December 2008.
Under the Guidelines, a commercial bank is required to establish its loan management procedures and information system for the acquisition loan business based on the principle that such procedures and system for the acquisition loan business must be more stringent than other types of loan business.
CBRC stipulates that the following requirements must be met for banks to be qualified for M&A lending: good risk management and internal control mechanism; adequacy ratio of loan loss provision not less than 100%; capital adequacy ratio not less than 10%; and professional teams on M&A due diligence and credit risk assessment.
The Guidelines point out that commercial banks must require the borrower to provide adequate guarantees, including but not limited to asset-backed, equity pledge, and third-party guarantees and other forms of security in compliance with the law.
The Guidelines are expected to be a boost to the local M&A market and would help domestic companies undertake overseas M&A activities. Industry insiders explain that an M&A loan is similar to a bridge loan, which is used as a short-term transition loan. The issuing of an M&A loan is to promote “small risk to large”. The “snake eating the elephant” approach to M&A transactions contends that once it is backed by funds, is more likely to be successful. However, the actual implementation of the Guidelines remains to be seen.
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