Recently, in the course of providing legal services, the author was involved in a transaction in which a bank used a wealth management product to invest in an infrastructure project. To solve its financing issues, the infrastructure project contemplated attracting other investors through equity financing of the project company. The bank utilised funds from its wealth management product fund pool to invest close to RMB1 billion (US$163 million) through its trust company in the project company by way of a capital and share increase and, before maturity of the wealth management product, divested from the project company by way of a one-way reduction of the capital of the project company to realise the returns.
For infrastructure project investors, bank wealth management products exceeding RMB25 trillion in total are like a cake suspended in the air, and getting a piece of it is not only dependent on the investor’s vision and strengths, but also on whether it has the guts to try a new means of project financing.
Bank wealth management products are a new financing channel for infrastructure projects. Bank investment products that invest in the infrastructure sector are usually in the form of a trust. The trust company co-operates with a bank, with the bank offering a renminbi-denominated wealth management product and, after the funds are raised, the trust company is then responsible for investing them in the relevant project.
The cost of the funds invested in the infrastructure projects generally does not exceed 8%, which is relatively low when compared to other financing methods. Furthermore, entering an infrastructure project though a capital and share increase can not only relieve capital pressures, but can also reduce the project company’s – and its original shareholder’s – asset-to-liability ratio.
There are two common ways for a bank wealth management product to enter the investor’s project. One is a capital and share increase and the other is the acquisition of an equity interest in the investor. Comparing the two methods, the former poses relatively fewer policy obstacles for a state-owned enterprise (SOE). Under an equity acquisition, if the investor is an SOE, the equity transfer will involve an equity valuation and a transaction on an exchange. The outcome of the valuation and transaction may be vastly different from the financing costs agreed by the parties. Accordingly, the means by which the funds of the financial institution enter the project requires a professional team to assist the investor in designing the same, based on the features of the project.
There is a relatively large difference between an institutional investor shareholder and an ordinary shareholder. When a bank wealth management project enters an infrastructure project through an institutional investor as shareholder, its objective is to obtain fixed returns, and not really to bear the risks of a shareholder. However, for an institutional investor, the greatest risk lies in the abortion of the infrastructure project, with the institutional investor then becoming a real shareholder instead of a nominal shareholder, thereby making it impossible to realise the returns after maturity of the wealth management product.
There are at least two ways to resolve such risk. The first is legal and financial due diligence of the infrastructure project, so as to ensure its lawfulness and stable cash flow and returns for a period of time. The second is the need for reliable security, including joint and several guarantee, mortgage, pledge of equity, pledge of accounts receivable, etc., so as to ensure that even if the project is aborted or becomes loss-making, there remains a path for the bank wealth management product to realise returns. It requires a professional team to assist the financial institution to implement such measures throughout the entire process.
Entry of a bank wealth management product usually requires the consent of the party co-operating in the project. In an infrastructure project, the government party will usually require that, during the project construction period and/or operation period, changes in the equity of the investor require its consent. Based on that requirement, the government party, out of considerations of stability, will strictly require that the capital for the project be contributed by the investor itself, and may not consent to the investor opting for the equity financing method, thereby making the implementation of this financing method impossible.
Accordingly, an experienced advisory team will usually require in the negotiations on a build-transfer (BT), build-operate-transfer (BOT) or other such contract for an infrastructure project that the government party consent to the investor deciding at its own discretion on any changes in equity that occur in connection with financing of the project, and that such changes in equity do not require its consent.
Entry of a bank wealth management product usually requires the consent of other financial institutions. When a bank loan or other form of financing is used for an infrastructure project, the financial institution will usually specify in the loan contract that, before it has repaid the loan in full, the investor may not reduce its registered capital, or change the equity structure of the project company, etc. without the consent of the financial institution. Accordingly, before securing financing through a bank wealth management product, the investor of the project needs to communicate and co-ordinate with the relevant financial institutions to avoid the breaching of other financing contracts, thereby triggering recall of the loans by the other relevant financial institutions.
The means of divestment by the bank wealth management product needs to be judiciously selected. There are also usually two methods of divestment available to a bank management product, one being an equity transfer and the other a direct capital reduction. The two methods involve the issue of the method of paying the funds and the issue of the complexity of the procedure at the time the bank wealth management product divests.
Under the equity transfer method, when the bank wealth management product divests, the equity transfer moneys are paid by the initial shareholder of the project company. Under the direct capital reduction method, the funds are paid to the trust company channel of the bank wealth management product by the project company, with the capital reduction procedure being relatively more complex. Which method of divestment to choose also requires the professional team to assist the investor in designing the method based on the features of the project.
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