Legal issues in tempting perpetual bonds

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Issuing perpetual bonds has become an attractive option for Chinese companies, but there are legal issues to be aware of, an expert has warned.

King & Wood Mallesons (KWM) recently acted as international counsel for Weichai Power on its US$775 million 3.75% senior perpetual bond offering, which the firm said was the largest such offering to date by a PRC company.

周浩 ZHOU HAO
周浩
ZHOU HAO

“The first thing that potential Chinese issuers need to know is perpetual bonds are generally priced with a projected buyback date, despite what the term ‘perpetual’ may suggest,” Zhou Hao, a partner at KWM in Hong Kong, told China Business Law Journal.

“This means that usually both the issuer and the investors know the bond will be repurchased at a pre-set price, within three or five years, for example, unless the issuer can live with an interest step-up by that time.”

Zhou said that an issuer needs to, with help from bankers and lawyers, initiate a discussion with its auditors as soon as possible to confirm the equity accounting treatment. Attention should also be paid to potential restriction on dividend payments under the bond terms.

In addition, “NDRC and SAFE registrations are still required just as with a conventional bond,” said Zhou. “A perpetual bond is technically treated as equity, rather than debt, for accounting purposes. As such, issuers may use it to reduce their debt exposure and improve their gearing ratios.”

Zhou said most Chinese issuers relied heavily on onshore bank loans and gearing ratio is a key factor the onshore lenders look at in credit lending.

“In addition and very importantly, the central government has widely promoted deleveraging in both public and private sectors, which we believe will encourage more and more Chinese companies to issue hybrid securities such as perpetual bond and preference shares,” he said.