by Ralph Grayden
The nine-month hiatus on A-share initial public offerings (IPOs) may have taken away an obvious source of income for PRC corporate law practices but things are not all bad - companies still need to raise capital and have increasingly been turning their attention to bonds.
In fact, bonds have become such a popular method of capital raising in PRC that Reuters reported that Chinese businesses had issued RMB384bn of corporate bonds (and bills of one year and above) for the first four months of 2009. This compared to just RMB67bn a year earlier.
One lawyer who has benefitted from the surge in bonds issuance is Ye Beicheng, a Beijing-based partner at Zhong Lun Law Firm. Ye told ALB that there have traditionally been five key bond products in China - enterprise bonds, corporate bonds, financial bonds, mid-term notes and commercial paper. However, because the China Securities Regulatory Commission (the CSRC) suspended corporate bond issuance in the third quarter of 2008, there has been no corporate bond-related work this year. Instead, it has been mid-term notes and enterprise bonds which have had clients beating a path to his door.
Zhong Lun has advised on four major debt raising projects in the first half of this year - including the RMB5bn enterprise bond issuance by China Resources - and the firm continues to be involved in no less than six further bond issuance projects. And, while Ye sees a direct correlation between the suspension of A-share IPOs and the increased number of bond issuances, he does not necessarily think that the work will dry up now that the suspension has been lifted - not least because it is often a different type of client that is being attracted to bonds.
"The number of bond issuances certainly will decrease," he said. "However, commercial banks form the majority of bond investors in China and they are prohibited from investing in the stock market. So I think that the impact of a resumption in A-share IPOs will not be so drastic. To my understanding, issuing mid-term notes and commercial paper has become a viable alternative to mid-term and short-term bank borrowing."
The spike in bond-related work has also seen White & Case recently advise Greentown China Holdings as issuer's counsel in connection with the cash tender offer and consent solicitation for its US$400m (RMB2.7bn) of 9% senior notes due in 2013. Greentown, which develops luxury residential properties in PRC, offered noteholders who tendered and consented by the consent date a total consideration of US$850 for every US$1,000 of principal amount outstanding of its notes. Approximately 92 % of noteholders consented. While other China-based companies have sought to undertake tender offers and consent solicitations in recent months, Greentown was the first to secure the overwhelming support of investors.
The partner who led the deal for White & Case, Anna-Marie Slot, sees the deal as a benchmark for future work, should the GFC continue. "This tender offer and exit consent demonstrates that Chinese companies can successfully use such transactions to help restructure their capital structures and potentially increase financial flexibility during the current credit crisis," she said.
So it seems that while the suspension of IPOs may have forced Chinese companies to look to alternative methods of raising capital, some of these may have a lasting impact on the way they - and the lawyers that advise them - continue to do business.