Over the past five years, local Chinese banks have become increasingly active in leveraged buyout (LBO) financings, especially those backed by international private equity (PE) firms. These banks offer terms (including loan tenure, pricing, financial ratios and loan size) that are more favourable than those offered by international banks. This trend is particularly noticeable in leveraged financing deals aimed at privatising Chinese companies listed in overseas capital markets.

International banks remain the preferred financiers for multinational companies operating in China.

Mezzanine debt funds have also been active in the high-yield lending market, targeting Chinese real estate developers affected by a significant liquidity shortage in the real estate capital market. These funds, primarily from insurance companies, provide mezzanine financing to PE sponsors aiming to sustain their senior financing and maintain their loan-to-cost (LTC) ratios when the valuation of their portfolio companies decreases significantly. These aspects will be discussed in greater detail in subsequent sections.

The most common LBO transactions involve PE sponsors and international companies selling their China portfolio companies to international strategic buyers, domestic state-owned enterprises (SOEs) or insurance companies. PRC insurance companies and SOEs are the main buyers in these transactions, and typically do not pursue IPOs or trade sales as exit strategies; instead, they prefer targets that offer stable cash yields. Chinese banks have provided robust financing support to these deals, offering favourable interest rates, financial covenants and large loan sizes, as the targets generally have strong cash profiles and are considered attractive assets. Loan documentation often adheres to standards set by the Loan Market Association (LMA) or Asia-Pacific Loan Market Association (APLMA), and is widely accepted by Chinese commercial banks.

The capital market in Hong Kong has shown clear signs of recovery over the past year, with a notable increase in the number of IPOs. That being said, buyers and sellers in the LBO market remain cautious due to the uncertainty surrounding potential geopolitical policies. Many PE sponsors in this region are seeking refinancing for their existing leveraged deals or recapitalisation financing for their portfolios to meet the distribution to paid-in criteria required by their limited partners (LPs).

While lenders are familiar with traditional refinancing, they find recapitalisation financing challenging for the following two main reasons.

• PRC banks were not authorised to fund recapitalisation loans through dividend distribution. Therefore, loans for purposes not explicitly permitted by PRC rules are usually funded by international lenders or certain offshore branches of PRC banks.
• Some PRC banks are wary of providing loans for dividend recapitalisations due to ethical concerns. They perceive that such transactions primarily benefit PE sponsors by enabling early returns, potentially at a time when the portfolio companies are not yet ready for a significant IPO or trade sale. This could increase the banks' risk exposure, as the borrowers' ability to repay may be compromised by the additional recapitalisation loans.

Faced with challenges in raising funds from US or European LPs for new transactions, Asian-based general partners (GPs) are now turning to RMB LPs and other Asian sovereign wealth funds. By establishing funds onshore in China, these sponsors can access lower-cost RMB lending sources – the RMB lending base rate has been lower than that in Western markets for the past few years, in a trend expected to continue. This arrangement enhances lenders' risk appetite by aligning them closer to the target assets and the cash flows they generate, while also allowing sponsors to benefit from onshore interest costs as a tax shield, which is not available when acquisition loans are made to an offshore holding company.

The breakthroughs in large AI models achieved by PRC companies since early 2025 have led to a re-evaluation of Chinese hi-tech company stocks in the Hong Kong and US markets, driving increased activity in mergers and acquisitions (M&A) among hi-tech companies, data centres and AI technology firms.

For complex acquisition finance/LBOs where the borrower is an offshore entity, Hong Kong law is frequently used and accepted by lenders and sponsors.

PRC law has been the prevailing choice for domestic corporate and acquisition loans where both lenders and borrowers are onshore entities.

The New M&A Loan Rules

On 31 December 2025, the National Financial Regulatory Administration issued the Acquisition Loan Management Rules (the “New Rules”), replacing the 2015 version of the Risk Management Guidelines for Acquisition Loans (the “Old Guidelines”), which had been in force for many years.

The key amendments in the New Rules include:

• broadening the scope of M&A loans to allow their use for non-control acquisitions (ie, minority investment into a target company);
• for control-type acquisitions, raising the maximum loan-to-transaction value ratio (to 70%) and extending the maximum loan term (from seven years to ten);
• imposing differentiated qualification requirements for banks engaging in control-type versus non-control-type M&A lending, based on asset size; and
• emphasising the assessment of the borrower’s debt service capacity, with equal focus on both the borrower and the transaction itself.

Under the Old Guidelines, the core logic of M&A lending was “control”. As a result, many strategically important minority investments or upstream/downstream integration transactions (without a controlling stake) struggled to obtain M&A loan financing from PRC banks. The groundbreaking provision in Article 4 of the New Rules formally incorporates “non-control M&A loans” into PRC commercial banks’ M&A loan product lines. To apply for a non-control M&A loan, the borrower must satisfy the following conditions:

• Initial transaction – the equity interest acquired in a single transaction is not less than 20% of the target company.
• Subsequent increase – if the borrower already holds 20% or more equity interest of the target company, the equity interest acquired subsequently in a single subscription or transfer shall be not less than 5%.

The most obvious positive change under the New Rules is the extension of the maximum term for control-type M&A loans. This is a significant boon for M&A transactions in infrastructure, energy, and certain high-end manufacturing sectors, which typically have long payback periods. It should be noted that the maximum loan term for minority acquisition transactions is still seven years.

Restrictions on refinancing

A key restriction under the New Rules is the refinancing of existing M&A loans. Under the Old Guidelines, it was common market practice to use a new loan to refinance an existing M&A loan, or to extend the repayment schedule through refinancing. The New Rules, however, impose clear restrictions on such a “loan-to-loan replacement” approach. Article 27 of the New Rules explicitly provides “M&A loans shall not be used to refinance the existing M&A loan of an acquisition financing transaction”. This means that if a borrower already has an outstanding M&A loan, and wishes to borrow a new loan from a PRC bank to replace the old one, or hopes to roll over the maturing loan to avoid imminent repayment pressure, such action will be restricted under the New Rules. This provision closes the loophole that allowed the continuous use of refinancing to mask the risks of an M&A transaction. Borrowers in existing projects that had planned to use “debt rollover” to maintain liquidity should arrange their funding well in advance.

If sponsors are unable to secure an exit through an IPO or trade sale by the time the existing M&A loan matures, they must orchestrate a new acquisition transaction (or set up a continuity fund) to finance a new deal on the same target, using the new loan proceeds to retire the debts from existing lenders.

This new fund structure allows new investors, seeking fixed returns similar to those of mezzanine credit investors, to join (by contributing new cash) existing LPs, which will roll over their shares into the new fund. Despite significant valuation markdowns demanded by senior lenders and mezzanine investors, this strategy helps to maintain the overall loan-to-value (LTV) ratio based on current market valuations, thereby not materially altering the internal rate of return for original LPs.

APLMA standard documents are widely used in cross-border transactions in this region. For domestic transactions (particularly where the lenders are Chinese banks), local Chinese banks normally encourage the use of template documents formulated by each bank or those prepared by the China Banking Association.

For complicated leveraged financing transactions with foreign sponsors, Chinese banks can accept and execute the English version of loan documents (with no Chinese translation or Chinese version), according to the PRC counsel’s opinion in reconciling the consistency of English terms with their credit committee approvals.

PRC branches of international banks can only accept and execute the Chinese version of loan documents when their borrowers are PRC local companies, while the prevailing market practice is to adopt the English version for the facility agreement (with the Chinese translation or summary) and the Chinese version for security documents, to accommodate local registration requirements.

Counsels are expected to cover the following aspects in their opinion:

• due incorporation and the valid existence of the borrower;
• authorisation of finance documents;
• due execution, not conflicting with the law, legality, validity and enforceability of finance documents;
• creation of security;
• applicable tax;
• choice of law; and
• dispute resolution and venue.

PRC lenders may also look for opinions on compliance with certain regulatory requirements, including the foreign debt registration as required by the National Development and Reform Commission of China and/or the State Administration of Foreign Exchange of China (SAFE), the LTV/LTC regulatory ratio, etc.

To facilitate a more efficient investment exit in light of cross-border foreign exchange controls (from the investor’s perspective) and to take advantage of certain tax benefits offered by an offshore sale structure (from the seller’s perspective), sellers of PRC assets prefer, or are asked by investors, to set up an offshore investment holding structure and place their PRC operating companies or assets under such offshore holding companies. The acquisition is usually constructed as a sale and purchase of shares in offshore holding companies.

In such a deal construct, the senior loans normally comprise two tranches:

• one offshore tranche extended to the acquisition vehicle of the buyer financing the purchase consideration; and
• one onshore tranche extended to the main onshore operating company to take out the existing corporate or construction loans.

The offshore tranche is still categorised and priced as a senior loan, but the offshore loan is technically structurally subordinated to the onshore loans. For real estate loans, offshore lenders will seek to have a second lien mortgage over the onshore real estate properties to improve their subordination position, which may face challenges as outlined in the upstreaming security section in 3.4 Bonds/High-Yield Bonds. Hence, this request is rarely accepted in sponsor-financed transactions.

Many offshore lenders also enter into intercreditor agreements with onshore lenders to share security or achieve co-ordinated security enforcement arrangements, which can also prove to be quite challenging, as discussed in 4. Intercreditor Agreements.

For those domestic LBO deals where both lenders and borrowers are PRC entities, an offshore investment holding structure is not a must. There will be only one senior acquisition loan, to be provided by onshore lenders to the onshore borrower for its acquisition of the equity interest of the onshore target company from the seller.

Mezzanine loans are not commonly seen in sponsor financing, as PE sponsors may easily access 60‒65% LTC loans from senior lenders in this market (with combined use of onshore and offshore loans, since onshore lenders are subject to a regulatory cap of 60% LTC for acquisition loans).

Mezzanine loans are more frequently seen in real estate financing extended to real estate developers, which cannot use bank loans to finance their land acquisitions or are restricted to bank loans to finance their operating expenditures or capital expenditures when they fail to meet certain regulatory financial ratios. Such real estate developers will place their onshore development companies under an offshore holding company, which will utilise mezzanine loans from credit funds and then infuse equity into onshore project companies. Such a mezzanine loan will normally yield 12‒18% interest but will obviously be structurally subordinated to onshore senior creditors without the protection of an intercreditor arrangement.

A new mezzanine structure has been seen in continuity fund deals, as discussed in 1.2 Corporates and LBOs.

There are bridge loans in LBO deals, where the target is cash-rich but cannot provide cash security to the acquirer due to financial assistance restrictions. In a typical reverse merge deal, the lenders may extend a cash bridge facility to the merger subsidiary of the sponsor, supported by the agreed amount of cash from the target company being placed into an escrow account opened with the lender (not a security, given the financial assistance restriction). Such escrow arrangement will be replaced by a cash pledge or account charge arrangement after completion of the contemplated merger. The cash bridge loan will remain if the target’s PRC operating subsidiaries do not want to pay dividends from the charged cash to the offshore borrower due to the potential tax leakage, but will otherwise be paid off if they want to distribute dividends to an offshore borrower.

PRC companies may adopt two different types of issuer structures to issue bonds/high-yield bonds in the offshore capital market:

• offshore issuer; and
• onshore/domestic issuer.

Offshore Issuer

The founders of a PRC company may establish a Cayman entity as an offshore holding company and bond issuer, which will, in turn, own a series of PRC operating entities via one or more British Virgin Islands and/or Hong Kong intermediary holding companies. Bonds issued by such issuer may utilise the following credit enhancement routes.

• A Pure Credit Bond: Investors may be entirely comfortable with the credit profile of the issuer and its onshore subsidiaries and require no other credit enforcement.
• A Listco Guarantee: Some Hong Kong Listcos may carve out some PRC assets and place them under a standalone Cayman issuer, which will issue bonds/high-yield bonds. The Listco will still guarantee these bonds to enhance its credit profile.
• Upstreaming Security: To improve the bondholder’s structured subordination position, PRC operating entities may provide asset collateral (a real property mortgage, an equity pledge, etc) to secure the offshore bonds. This is regarded as an outward security securing offshore debt under PRC law, which must be registered with SAFE. Such registration is a merit review and is unlikely to obtain SAFE approval unless the offshore bond issuer (on a standalone basis) can prove that it has stabilised cash flow to service offshore debts, and that the likelihood of the upstreaming security being enforced is low. Failure to complete the registration will not render the guarantee/security documents invalid, but outbound remittance of the enforcement proceeds or performance payments could be delayed or blocked, as the account banks processing such remittance are under a regulatory obligation to verify the SAFE registration certificates.
• Keepwell: Considering the challenges from the guarantee or upstreaming security structure, Keepwell undertakings from the onshore parent of the issuer are also commonly adopted. Typically, the parent acting as the Keepwell provider will undertake to investors that it will disburse funds offshore from the PRC to provide certain financial or liquidity support to the offshore issuer. The parties will acknowledge that the Keepwell arrangement is not a guarantee.

Onshore/Domestic Issuer

PRC companies may issue bonds/high-yield bonds directly into the offshore capital market. Typical credit enhancement measures may include:

• a standby letter of credit issued by a commercial bank, which is counter-guaranteed by the parent group; and
• if the issuer is separated from its parent group, a guarantee provided by the parent group.

The structure for private placements/loan notes is almost identical to that outlined in 3.4 Bonds/High-Yield Bonds.

In the acquisition finance area, direct purchase of the assets may not be a preferred choice mainly due to tax considerations. As mentioned, PE sponsors typically carry out acquisitions by way of equity rather than asset transactions. Therefore, in the PRC market, asset-based financing deals are not frequently seen in industries other than real estate. For real estate loans, lenders usually adopt similar secured lending structures to those discussed in 3.1 Senior Loans, with the typical security package comprising the following, with the purpose of ring-fencing the asset values and the future cash flows of the borrower:

• a mortgage over the property;
• a pledge over the account receivable if the property is leased; and
• an assignment of rights under the material contracts, including insurance policies and leases (to the extent that such rights are not subject to the receivable pledge above).

In asset-based lending, considering the assets will be the core repayment sources (together with the cash flow generated during the loan tenor), this structure is less attractive to international banks if there is an offshore tranche, because of the structural subordination issue.

On the contrary, some PRC banks will consider extending the offshore tranche loans through their free trade zone (FTZ) branches. As the FTZ branches are PRC entities, second lien mortgages created in favour of those bank branches will not constitute outward security requiring SAFE registration. As such, PRC banks with FTZ branches are key participants in this niche market.

A typical intercreditor agreement under an offshore/onshore dual tranche transaction includes the following arrangements.

Priority of Payments

As discussed in 3.1 Senior Loans, the offshore loan is structurally subordinated to the onshore loan, and the intercreditor agreement will specify the types of payments that the onshore lenders can receive pursuant to the onshore finance documents. While the scope of such types of payments is deal-specific and will be negotiated, the market consensus is that only enforcement proceeds recovered by the onshore lenders should be subject to payment subordination, while other regular payments under the finance documents (including payment of interest or default interest, repayment or prepayment of onshore loans, and payment of indemnities, costs and expenses) should be permitted as long as no default has occurred and/or is continuing.

As a new development in the market, there is an increasing trend of offshore lenders being able to secure a second lien mortgage even though it is still not prevailing market practice in sponsor-financed transactions. In turn, borrowers will argue that, given the new security, an intercreditor agreement is no longer required, as the typical intercreditor agreement is intended to solve the structural subordination issue. However, most lenders still deem it necessary to have the intercreditor agreement in place for the following reasons.

• With the assumption that an offshore mortgage is in place, an intercreditor agreement customarily regulates matters other than joint security, such as co-operation on defaults and enforcement actions, notifications of defaults, cure/purchase rights, etc. Therefore, perfection of the property mortgage does not mean that the intercreditor agreement is no longer relevant.
• In case of enforcement of the combined financing in the current market, the buyer is likely to be onshore and purchasing the wholly foreign-owned entity (WFOE). Therefore, the equity pledge over the onshore borrower is an important security for the offshore lenders, and enforcement arrangements between onshore and offshore lenders remain critical in terms of protecting offshore lenders’ interests.

Standstill

All the lenders must refrain from taking any action to accelerate the loan or otherwise enforce any part of the security package within 90 days of the occurrence of an event of default (and, if agreed, for a further 90 days), and must do their best to reach a consensus on how to enforce the security package (either an offshore sale of shares or an onshore sale of real properties and other operational assets).

Sharing of Security Proceeds

Onshore and offshore lenders agree to share the security enforcement proceeds on a pro rata basis. This is not easily achievable due to PRC foreign exchange control rules, including that:

• PRC lenders are not allowed to voluntarily waive part of their entitlement to the outstanding loan amounts or security proceeds unless they have special approval from the banking regulator; and
• PRC borrowers or security providers may not provide upstreaming security to offshore lenders unless such security is registered with SAFE, which is a merit review, and meets specific conditions that are not easy to satisfy.

Call Option

Onshore and offshore lenders will grant each other a call option to purchase the entire portion of outstanding loans held by another group of lenders when both sides cannot reach a consensus on how to enforce the security package.

The approach to bank/bond deals is similar to that detailed in 4.1 Typical Elements.

The role of hedge counterparties is similar to the roles described in standard LMA documents. The hedging arrangements may be put in place prior to or post signing. Typically, the hedging liabilities for the senior debt and the senior debtor will rank pari passu, and the hedging counterparties will benefit from the same guarantees and security package of the senior debt.

In sponsor financing, the borrower will also request to select, at its discretion, a hedge counterparty that is not a syndication lender. However, the lender will usually ask for a first right to offer and a last right to match the hedging terms, thereby limiting the possibility for a third-party creditor to come in and share the guarantees and securities.

Shares

Pledges can be created over shares in a limited liability company.

Inventory

A floating charge over inventory, including raw materials, semi-finished products and finished products, can be created.

Bank Accounts

A pledge over bank accounts (in essence, a pledge over the deposits therein) will only be recognised when:

• the pledgee has actual control over such account; or
• the inflow and outflow of funds are for one specific category of use.

Receivables

Pledges over account receivables can be used rather than the security assignment or the debenture, as frequently used in other jurisdictions.

IP Rights

A pledge over IP rights can be created.

Real Property

Mortgages over real properties can be created.

Movable Properties

A pledge over movable properties is possible when possession of such properties could be delivered to the creditors. If possession is not deliverable, then a mortgage over movable properties can be created.

There are no form requirements under PRC law.

Share Pledge

Shares of a non-public company are to be registered with local branches of the State Administration of Market Regulation, and shares of a listed company are to be registered with the China Securities Depository and Clearing Corporation (CSDCC).

Bank Account Pledge

There is no registration requirement, but the pledgee should either control such an account or designate an agent to control the account.

Receivables Pledge

Registration with the online registration platform of the People’s Bank of China (PBOC) is required – ie, registration with the Unified Registration and Publicity System for Movable Property Financing of the Credit Reference Centre of the PBOC (the “PBOC System”).

IP Rights Mortgage

Registration of trade mark rights and patent rights with the China National Intellectual Property Administration is required, as is registration of copyrights with the Copyright Protection Centre of China.

Real Property Mortgage

Registration with the real estate exchange centre in different localities is required.

Movable Property Mortgage

Registration with the PBOC System is required.

When both the parent company (“ParentCo”, LBO loan borrower) and operating subsidiaries (“OpCo”) are PRC domestic companies, there appear to be no legal constraints preventing OpCos from providing upstream security to the ParentCo. When the OpCo is a joint venture with a partner outside the ParentCo group, then such upstreaming security must be approved by the shareholders’ meeting of the OpCo, with the ParentCo refraining from voting.

When the ParentCo is an offshore company and the OpCos are PRC domestic entities, the OpCos are unable to provide upstream security to the ParentCo unless they can register such upstream security with SAFE as an outward security for offshore debts, which is not easily achievable, as discussed in 4.1 Typical Elements.

The Administration Rules for a Listco Takeover provide that a listed company in the PRC is not permitted to provide financial assistance to an acquirer. Such restriction does not apply to non-public companies, which can provide security to support the financing of an acquirer subject to compliance with the requirements below, including such security being properly approved by the shareholders/directors.

The amended Company Law came into effect on 1 July 2024, and Article 163 states that a joint stock company is prohibited from providing gifts, loans, guarantees or other financial assistance to any person for the purpose of acquiring shares in the company or its parent company.

Exceptions to this rule are allowed if the assistance is intended to implement employee stock ownership plans or if it benefits the company as approved by the shareholders' meeting or the board of directors. Such approval must comply with the articles of association or be authorised by the shareholders' meeting, and must receive affirmative votes from at least two-thirds of all directors. In addition, the total financial assistance provided under these exceptions must not exceed 10% of the company’s issued share capital.

It is important to note that this provision does not specify the precise approval requirements for the shareholders’ meeting, such as when approval is mandatory or the exact voting thresholds. These procedural details are expected to be clarified in future judicial interpretations or listing rules.

PRC law does not have a general corporate benefit test requirement, although if a company is to provide security for the indebtedness of a third party, this security must be approved by the shareholders’ meeting or board meeting, pursuant to the stipulations of the articles of association of the company.

The PRC Company Law provides that a connected shareholder must refrain from voting on resolutions regarding the company providing security to a creditor for the benefit of such connected shareholder, to avoid the majority shareholders of a company abusing the assets and resources of the company.

In a typical onshore/offshore PRC acquisition financing, there are three principal methods of loan enforcement for the offshore lenders.

Option 1: Enforcement of the Offshore Security

This involves the sale of the offshore borrower’s equity interests pursuant to the enforcement of the relevant share charge, or the sale of the PRC WFOE, which is owned by the offshore borrower, pursuant to the enforcement of the equity pledge. The objectives of taking enforcement steps offshore are to:

• seek to obtain control over the WFOE through taking control of the offshore borrower (or other offshore obligors, if any); and
• ring-fence and preserve the assets of the WFOE (in particular, the real property) with a view to assessing the feasibility of a consensual restructuring, or alternatively disposing of the assets.

These objectives are driven by the fact that substantially all the valuable assets of the group obligors are held by the WFOE. However, the offshore lenders do not have any direct security over such assets, nor do they have the right to share in any recoveries from the enforcement of the onshore security documents.

Subject to the stipulations under the borrower share charge and the applicable laws in the foreign jurisdiction where the borrower is incorporated, the offshore lender typically has contractual rights under the borrower share charge to exercise certain self-help remedies to sell the shares of the offshore holding company to a third party. This would be the quickest method, if the offshore lender can locate a third-party purchaser ready to close the deal.

Option 2: Sale of the Onshore Business/Assets in Connection With Exercising the Offshore Security

By enforcing the security over the shares in the offshore borrower (by appointment of a receiver or, if permitted, sale to a nominee of the offshore security agent), the offshore lender can effectively control the borrower and the WFOE from offshore.

The benefit of obtaining management control of the WFOE is that it will give greater flexibility for the offshore and onshore lenders to co-operate to effect a consensual enforcement of the onshore securities (rather than a court-based enforcement). In the event that enforcement action is taken onshore, it will also be necessary for the offshore lender to have control of the WFOE in order to control the upstreaming of any excess proceeds from the enforcement (after discharge of the onshore loan) to repay the offshore loan.

In particular, upon taking such control, the offshore lender can:

• assess the financial position of the WFOE;
• seek to control cash flow and prevent the incurrence of further liabilities or the dissipation of assets by the WFOE;
• initiate the onshore sale of the business/assets;
• to the extent possible, repatriate sale proceeds by way of dividend;
• cause the WFOE to repay the shareholder loan in full, if there is one; or
• cause the directors of the WFOE to commence onshore liquidation and repatriate the remaining funds after the liquidation proceeding.

Option 3: Enforcement of the Onshore Property Mortgage

This involves enforcement of the first-priority mortgage over onshore assets (including real property and other movable assets) and then the repayment of the onshore loan and repatriation of the sale proceeds outside the PRC to repay the offshore loan through repayment of a shareholder loan, a declaration of dividends or the winding-up of the WFOE.

The attractiveness of enforcing through the property mortgage will depend on a number of factors, including:

• who benefits from the mortgage (ie, just the onshore lender or also the foreign shareholder) relative to who is initiating the enforcement process (eg, the offshore or onshore lender); and
• the degree of mortgage coverage and the likelihood of competing creditor claims.

Unless the onshore borrower agrees, the enforcement of mortgages is a court process, which could be time-consuming. An offshore lender is unlikely to look to the mortgage as a means of enforcement if it has no or limited mortgage coverage (often the case), while an onshore lender will view mortgage enforcement as one of its primary means of enforcement.

Under PRC law, a creditor with a mortgage over a debtor’s property may enforce its remedies under the mortgage through a consensual sale and/or a judicial sale. In each case, the creditor will have lien priority over all junior secured creditors and all unsecured creditors with respect to the proceeds of the sale of the property.

Since sponsor deals are usually non-recourse deals, there will be no sponsor guarantees, and the typical type of guarantees will include:

• before acquisition closing, guarantees from the acquisition SPV and the intermediary holding companies underneath it; and/or
• after acquisition closing, guarantees from the target company (if not merged with the acquisition SPV) and its operating subsidiaries (or selected material subsidiaries).

When both the ParentCo/LBO loan borrower and the OpCo are PRC domestic companies, there are no legal constraints preventing the OpCos from providing upstream guarantees to the ParentCo.

When the ParentCo is an offshore company and the OpCos are PRC domestic entities, the OpCos are unable to provide an upstream guarantee to the ParentCo unless they can register such upstream guarantee with SAFE as outward security, which is not easily achievable.

The Administration Rules for Listco Takeover provide that a listed company in the PRC is not permitted to provide financial assistance (including a guarantee) to an acquirer. This restriction does not apply to non-public companies, however, which can provide security (including a guarantee) to support the financing of acquirers subject to compliance with certain requirements, including such security being duly approved by the shareholders/directors (and, in the case of a listed company, making a public announcement via the relevant stock exchange).

It is not mandatory under PRC law for parties to collect guarantee fees. In the market, it is also rare for an affiliated guarantor to charge guarantee fees to another guaranteed affiliate.

There are no enacted laws or regulations clearly recognising equitable subordination. Contractual subordination arrangements between the senior creditor, the subordinated creditor and the debtor are generally recognised by PRC law.

When the target company provides security to an acquirer within the claw-back period before filing for bankruptcy (one year before the court’s acceptance of a bankruptcy petition), such security may be viewed as a preferential or fraudulent property transfer by the target company. The bankruptcy administrator may then decide to void such security provision and recover the property if they can prove that the property transfers were made with the intent to hide assets or that the transfers of property were for less than the fair market value before the bankruptcy of the target company. There are not many such precedents in PRC insolvency law practice.

The main mitigant could be that such security creation was approved by a shareholders’ meeting of the target company, with the connected shareholder refraining from voting on said resolution.

PRC tax authorities will generally charge each lender and borrower stamp tax of 0.05% of the committed loan amount.

There is no withholding tax if both the borrower and the lender are PRC entities. An offshore lender that does not have any presence in the PRC but receives profits, interest or other income from the onshore borrower is subject to withholding tax on that income. The withholding tax rate is 10%, unless the offshore lender is from a jurisdiction with which the PRC has entered into a tax treaty that allows a preferential rate.

According to the PRC Enterprise Income Tax Law, the interest expenses paid by a PRC company to its affiliates for outstanding loans not exceeding the prescribed ratio of the debt investment and equity investment from its affiliates are deductible for corporate income tax purposes, while the interest expenses for the excess portion of loans may not be deductible. 

The prescribed ratio of debt investment and equity investment is generally 2:1, except in the case of financial enterprises, where the ratio will be changed to 5:1.  

The PRC Company Law regulates the joint stock company’s provision of financial assistance in the context of such company being taken over. The company shall not provide gifts, loans, guarantees or other financial assistance to another person to facilitate its acquisition of shares of the company or its parent company, unless the assistance is provided:

• to implement employee stock ownership plans; or
• for the benefit of the company, as resolved by the shareholders’ meeting or the board of directors (in accordance with the articles of association or the authorisation of the shareholders’ meeting, and with the affirmative votes of not less than two thirds of all directors), and the cumulative total amount of financial assistance shall not exceed 10% of the issued share capital.

Notably, the provision does not apply to the takeover of limited liability companies.

In respect of a tender offer on a listed target, the financial adviser must conduct due diligence over the acquirer’s financial capability and source of funds. The acquirer must provide at least one of the following facilities to demonstrate its payment ability:

• for cash consideration, the acquirer must deposit cash in an amount of no less than 20% of the total consideration with a bank designated by the CSDCC;
• for stock consideration, the acquirer must deposit all stock consideration with the CSDCC for custody;
• a bank guarantee to secure the payment of the entire offer consideration; or
• joint and several undertakings from the financial adviser to pay any shortfall of purchase consideration not paid by the offeror.

For leveraged deals where banks provide financing, the lenders can provide debt commitment to sponsors on a certain funds basis, on terms conforming to LMA standards.

There are no other relevant acquisition finance issues in the PRC.