[Ed. note: This post is authored by Evan Jowers and Robert Kinney of Kinney Recruiting--sponsor of the Asia Chronicles. Kinney has made more placements of U.S. associates and partners in Asia than any other firm in the past two years. You can reach them by email: asia at kinneyrecruiting dot com.]
Evan here, writing from sunny Sunny Isles Beach, Florida, where my wife and I call home when I am not traveling in Asia and the Middle East. After being abroad 10 of 12 weeks, it is nice to be here.
I would like to take this opportunity to briefly introduce our readers to a recent and important development in the China M&A market. In the midst of all the doom and gloom in Asia, with the global downturn most definitely reaching the Asia shores in the past few months, there has been a very positive development in China M&A regulations, a development that could dramatically increase M&A activity in the not too distant future.
Although M&A activity in China has seen a big surge over the past decade, government regulations have prevented M&A numbers in China from reaching the full potential in the market. However, on Dec. 6, the China Banking Regulatory Commission (CBRC) took steps to correct some significant limitations, by issuing the Guidelines on Risk Management of Acquisition Loans of Commercial Banks. These allow for the first time commercial banks incorporated under PRC law to make loans to companies for the purpose of M&A transactions, including equity and assets of target companies. This potentially opens the door to leveraged buyouts in China. These new guidelines, in large part, reverses the General Principles of Loans, put into effect in 1996, which forbid onshore banks to provide loans for purposes of a borrower’s equity investments in acquisition transactions.
However, only “strong” commercial banks, defined as those with at least 10 percent capital adequacy, will be able to make such loans. Among other requirements, the CBRC will also require such M&A loans to not have terms of more than 5 years; M&A loans cannot be more than 50% of the net core capital of the bank; a good risk management and internal control mechanism; and adequacy ration of loan loss provision being 100%; and the buyer and the target company must be highly related in business and strategy.
These new guidelines will likely not lead to a surge in leveraged buyouts in China in the very near future, but it is an important step, in that companies can now take loans for M&A activity within a legal structure, rather than doing such in a gray area.
More after the jump.