RMB Bond Issue
Q1. Why are so many foreign and Chinese companies accessing the RMB bond market?
A1. The main purposes are to seek fund projects, enhance liquidity and improve their working capital in China.
Q2. What is the Dim Sum bond market?
A2. Dim Sum bond market is the Hong Kong RMB bond market, and it is the first offshore2 market for Chinese currency investments and has increased significantly in the past few years.
Q3. What respect should be taken into consideration when issuing the RMB bond?
A3. Apart from the risks, the issuer should also consider the withholding tax and the offering circular liabilities.
Q4. What kinds of risk would likely occur during the issuing of the RMB bond? And what should be aware by the issuer?
A4. Currency risk and interest rate risk. An issuer should consider the source of RMB for the payment of interest and principal, as the offshore swap market may not have sufficient liquidity to accommodate large conversions, and the issuer should be aware of the regulation regarding bond issue in PRC, though there is no approval required in Hong Kong, and the change of global rate of interest.
Q5. What could the issuer do when it encounters the currency risk?
A5. An issuer could repatriate proceeds of an RMB bond issue by way of loan to its onshore subsidiary where the loan term and interest payments match those of the bonds. An issuer could use a combination of RMB dividends distributed by its onshore subsidiary and RMB obtained through cross-border trade settlement. The convertibility issue can also be addressed by a synthetic bond. The issuer is entitled to pay out in another currency if it is prevented from servicing the coupon or repaying the principal of its RMB bond issue due to specified events.
Q6. What is the regulation in China regarding the withholding tax of the RMB bond?
A6. For RMB bonds issued by Chinese companies, under the PRC Enterprise Income Tax Law and the PRC Individual Income Tax Law and implementation rules, an income tax is levied on payment of interest in respect of debt securities, including bonds sold by enterprises established within mainland China4 to non-resident enterprises (including Hong Kong enterprises) and non-resident individuals, (including Hong Kong resident individuals) resulting in an obligation on the issuer to withhold up to 10% on all interest payments. Therefore, the issuer is required to “gross-up” these payments so that the bondholders receive the full amount.
Q7. Who will be legally responsible for the accuracy and completeness of the offering circular?
A7. The issuer shall take all responsibilities and must dedicate the time and internal resources to ensure that the offering circular is properly prepared and accurate. Accordingly, the lead manager and the lawyers conduct due diligence in meetings with the issuer’s management, and the issuer’s auditors are asked to issue a comfort letter confirming all the financial information contained in the offering circular are correctly extracted from the issuer’s financial statements and internal records.
Q8. What could the issuer do when it does not have a strong enough credit rating (or indeed any international credit rating) to merit an unsecured bond issue?
A8. The issuer might be required to charge assets in favor of the trustee/bondholders, which are enforceable upon an event of default under the bonds. A detailed legal analysis on the legal rights to enforce security, and whether any governmental approvals are required to grant/enforce security, must be carried out as part of the due diligence process.