From their record-breaking global IPOs a few years ago to their many recent headline-grabbing debt deals, large PRC banks are firmly gaining an edge in the global financial markets. During the past two years, particularly given the limited availability of investment capital through traditional sources, banking & finance lawyers have been kept relatively busy by their emerging PRC clients.
One of the most high-profile lending arrangements is China Development Bank's record-breaking UD$20bn financing deal to Venezuela in August 2010. CDB has agreed to provide two loans to Venezuela for the development of its energy and infrastructure projects, and in return, China National Petroleum Corporation has secured future oil supplies from the Orinoco heavy oil belt. The financing facility is the largest that CDB has extended to any country and is one of the largest oil-for-loan deals in Latin America. A large group of lawyers from multiple offices of White & Case and Hogan Lovells were engaged to ensure the successful financial closure, with White & Case acting for the lender and Hogan Lovells for the borrowers.
"PRC banks are rising in the global markets on a substantial scale. The trend, I think, is mainly correlated with two factors. The first factor is the general withdraw of the international banks from providing long-term debt financing in 2008 and 2009, and the second is China's significant stimulus package," said Nigel Ward, a banking & finance partner of Norton Rose in Beijing. "During that difficult period, Chinese banks were one of the few sources of significant funding available, so many foreign companies that might have financed their businesses, assets and projects with their relationship banks in Europe or the US have been turning to Chinese banks."
Two financing deals Norton Rose closed in September provide another indicator of the increasingly important role played by Chinese banks in the development of overseas assets.
The firm's team, led by partner Nigel Ward, advised Export-Import Bank of China and Bank of China on a US$1.2bn loan to Brazil's iron ore producer Vale for the construction of 12 vessels at a Chinese shipyard. Another team, co-led by China practice head Ian McCubbin, advised China Development Bank and Raiffeisen Zentralbank Osterreich on the US$155m syndicated project financing for the development of Mt Cattlin spodumene mine in Western Australian.
PRC legal counsel comes to the table?
A recent cross-border financing project undertaken by ICBC, although it didn't involve billion-dollar loans, has its own significance. Advised by Zhong Lun, Herbert Smith and its associated Indonesian firm Hiswara Bunjamin and Tanjung, ICBC has provided the first RMB-denominated commercial loan to a non-Chinese borrower borrowing offshore.
ICBC's US$294m loan to Indonesia's Bakrie Telecom will be used by the company to finance the purchasing of telecom equipments from Huawei Technology. Herbert Smith's lead partner on the transaction Alexander Aitke believes that this loan structure will be used by more PRC banks and companies with different borrowers from other parts of the world, and it will trigger more interest from foreign companies to take up RMB-denominated loans. "Chinese banks are committed to supporting domestic exports to the rest of the world. One way in which they can show that support is to make the RMB valuable as a borrowing currency, thereby offering borrowers further flexibility," Aitke said.
In previous cross-border financing deals, the absence of PRC legal advisors was common. But with the rise of PRC banks and the promotion of RMB to be a settlement currency in Asia, PRC firms such as Zhong Lun will surely have a role to play - though it is a small role for now. Zhong Lun's lead partner on the financing deal Fan Rong frankly admits that his firm only undertook about 10% of the total legal work.
"We mostly provided advice on two aspects of the financing arrangements - specific regulatory issues and practical solutions regarding RMB funding and Sinosure cover. Most of the documentation and structuring were handled by Herbert Smith which acted as the lead counsel," said Fan. "Although the loan is in RMB, the governing law is English law. International firms, therefore, will play a central role in deals of this nature. But as more innovative financing arrangements become available and involve more China-specific issues and elements, PRC firms will inevitably be brought in for their expertise."
While Fan is confident that as the RMB gains ground as the settlement currency in the region's transactions and trade PRC firms will have more chances to bag a role in such deals, it still will be a long time before PRC firms can play a lead role in cross-border financing deals. "PRC legal advisors' time will come only when China has developed its own internationally renowned contract law regime and when Shanghai becomes a true international financial centre," he said.
Both PRC banks and PRC law firms are aware of the long, winding road ahead for them to become true, strong international players. But nothing is going to stop them from having such aspiration. "For the time being, the Chinese banks are essentially supporting Chinese industries and Chinese companies. But I believe they will move on to the next stage and become truly international banks, in the sense of funding projects where these is no Chinese content," said Ward.
Ward and international lawyers alike have also recognised the rise of a number of PRC firms, as they gain enormous experience and competence and have the ambition to become international firms in the same way as their US and UK counterparts have done.
"The only thing that's probably stopping a King & Wood from becoming a Clifford Chance is because PRC law is not used on international transactions. But it doesn't stop PRC firms from having the ambition to play a big part in cross-border transactions and become future global law firms," said Ward. "They will undoubtedly be able to provide some of the things that currently give advantages to international firms - such as global platform, worldwide experience working on similar transactions, ability to say what international normal practice is on a particular issue. As time goes on, the PRC firms will become competitive across the board." ALB