Access to funds for finance lease companies

By Liu Zunsi, Merits & Tree Law Offices
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There has been a sharp rise in the number of finance lease companies in China in the past couple of years and this has become an increasingly important aspect to the national economy and social development. However, unlocking access to funding is still a key hurdle to the growth of such companies in China. For these capital-intensive companies, getting relatively “cheap” capital is a top concern worthy of discussions.

刘尊思 Liu Zunsi 植德律师事务所 合伙人 Partner Merits & Tree Law Offices
Liu Zunsi
Partner
Merits & Tree Law Offices

A company may raise funds through either equity financing or debt financing. Equity financing may be enabled through, for example, a capital increase, an IPO, a backdoor listing, and going public on overseas exchanges, whereas debt financing is possible through bank loans, bank factoring, commercial factoring, note financing, leased asset securitization, trust loans, bond issues and so on. In this article, we will only discuss several most commonly used financing approaches.

Capital increasement. A share capital increase not only raises the net assets of a company, but also indirectly expands its business scale. Pursuant to the Measures for the Administration of Foreign-funded Lease Businesses (abolished), a finance lease company must restrict its risk assets to not more than 10 times its total net assets. In other words, a finance lease company is allowed to expand its business scale by nine dollars when its registered capital increases by one dollar. In practice, though there are many finance lease companies with registered capital amounting to hundreds of millions or even billions of dollars, constant share capital increases put funding pressure on their shareholders, who may find it difficult to reap cash returns on their investments.

Going public. Finance lease companies may go public either on the A-share market or in Hong Kong or other overseas jurisdictions via IPOs or backdoor listings, though not many have succeeded in doing so to date, be it on the A-share markets or overseas exchanges. Nevertheless, going public has been strongly attractive to a finance lease company, because a successful listing undoubtedly lifts the entity’s credit profile and financing capabilities, making it easier to gain access to capital, expand business scale and enhance its market competitiveness.

Bank loans. Provided at low interest rates for long terms, bank loans effectively help reduce costs of capital, although banks generally do not lend unless the borrowers meet stringent requirements, particularly an acceptable scale of business that benefits from steady transactions and cash flow. Currently, obtaining banking credit and bank loans is the most commonly used financing approach for finance lease companies.

Banker’s acceptance. A banker’s acceptance is a draft of deferred payment issued by a bank at the request of a payer, under which the accepting bank has a legally binding obligation to pay the stated amount on the maturity date of the draft. The draft may be issued for a term not exceeding six months, and may be transferred with endorsement during the term thereof.

To issue an acceptance draft, a lease company must pay a deposit in line with its aggregate line of credit from the accepting bank, and the difference between the deposit and the amount of the acceptance draft is considered the amount of financing received from the bank. With a short maturity and a low cost, some large finance lease companies frequently use banker’s acceptances to meet liquidity needs.

Factoring. As an approach to obtaining cash from banks or commercial factoring companies on the basis of accounts receivable, finance lease companies also commonly use factoring. Allowing finance lease companies to earn a spread between their finance leases and the factoring transactions, this practice involves a recourse process and a non-recourse process. Factoring with recourse requires finance lease companies to assume the risk of their lessees’ failure to pay rent fully as scheduled, whereas non-recourse factoring does not impose such a requirement on finance lease companies.

Factoring is also an important approach for finance lease companies to take money off the table, despite banks or commercial factoring companies’ squeeze on their profit margins.

Asset securitization. Launching securitization programmes with rent receivables of finance leases as underlying assets helps finance lease companies reduce financing costs, shorten the cycle of cash flow and optimize their financial statements. Given the stringent requirements on the issuers and underlying assets, finance lease companies do not have many finance leases eligible for securitization. On the other hand, a successful securitization programme not only provides access to capital, but also plays a positive role in building goodwill and on business development.

Internet finance. Finance lease companies may also obtain financing by transferring their rent receivables or borrowing monies from internet platforms. However, given the short investment periods (generally invested for a period not exceeding one year, or even half a year or three months) and high interest rates of monies obtained via internet finance programmes, it is highly likely that an internet finance platform uses short-term borrowings for long-term projects, thereby leading to maturity mismatch and other relating concerns.

Moreover, once the internet finance platforms fail to pay investment returns on time, finance lease companies will be exposed to new risks such as bank runs on such internet platforms and shareholders running away, or even criminal activity.

Besides the aforementioned approaches, finance lease companies may also obtain long-term financing at low costs by tapping into new financing channels accessible through trust firms, asset-management companies and insurers. To sum up, meeting needs of lessees by providing both funding and assets, finance leases effectively support the development of the real economy. As such, they receive strong policy support. It is believed that, with the further implementation of relevant state policies, finance lease companies will benefit from an increasingly diverse range of financing approaches and growing business scales.

Liu Zunsi is a partner at Merits & Tree Law Offices

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