Guidelines for Project Finance Business

Issuing Body: China Banking Regulatory Commission

Issuing Date: July 18, 2009

Effective Date: October 18, 2009

With per-project financing becoming an increasingly common method of funding infrastructure and other large-scale construction projects involving Chinese companies and banks, the China Banking Regulatory Commission (CBRC) has formulated new rules designed to reduce related risks and promote a healthier environment for such lending. Drafted in tandem with the Provisional Measures for the Administration of Fixed Asset Loans (which will often apply to at least portions of the same projects), the Guidelines for Project Finance Business (Project Finance Guidelines) were enacted on July 18, 2009, and take effect on October 18.

The Project Finance Guidelines apply to project financing in which funds come from Chinese banking financial institutions, regardless whether the financing is used for domestic investment or abroad. Many projects are, or will be, the result of economic stimulus measures enacted by the Chinese government in response to the global financial crisis. According to recent news reports, for example, the China Development Bank, one of the country's "policy" banks, has played an active role in funding high-profile offshore investments by state-owned enterprises, providing large amounts of money. The Project Finance Guidelines should apply to those projects as well.

The CBRC has also made it clear that the entire loan management process and the administration of project financing loans should also comply with the Provisional Measures for the Administration of Fixed Asset Loans, which is also summarized in this month's China Law Update.

Project financing is by its nature an inherently risky endeavor, as such loans are usually highly leveraged, involve large amounts of money, have relatively long terms, and often involve a number of parties both on the project and financing ends. In addition, the source for repayment of financing is typically the project itself. The Project Finance Guidelines are intended specifically to address such conditions.

Definition of Project Finance

"Project finance" is defined in the Project Finance Guidelines as loans that feature the following characteristics:

• The loan is usually used for construction of one or a set of large manufacturing facilities, real estate or other development projects, including infrastructure, and including the refinance of established projects or those that are already underway.
• The borrower is usually a legal person entity of business or public organization specially established for the construction, operation or financing of the particular project, including an existing legal person entity of business or public organization that mainly engages in construction, operation or financing of the project.
• The sources of loan repayment come mainly from sales revenue, subsidized revenue or other revenue generated from the project itself, generally excluding other repayment sources.

Provisions for Risk Management

Project finance lenders should have the capability to identify and manage the risks of the project. They may engage directly, or require the borrower to engage, one or more independent intermediaries with relevant qualifications to provide professional opinions or services for the project, such as legal, tax, insurance, environmental protection and the like.

Lenders should likewise fully identify and assess the risks inherent to both the construction and operating stages of the project, including in their analysis such factors as policy risks, fundraising risks, completion risks, foreign exchange risks, raw material availability and associated risks.

In assessing project risks, lenders should emphasize repayment capability analysis and focus on the feasibility of the technology, financial feasibility and the credibility of projected repayment sources.

To reduce and spread project risks in the construction stage, lenders should require the borrower or relevant parties involved in the project through the borrower to execute a master contract, obtain commercial insurance, incorporate a completion deposit and provide a completion guarantee. To reduce and spread risks in the operational stage, lenders may require the borrower to execute a long-term purchase and sale contract with the borrower—or to apply derivative instruments.

Lenders may, within the permissible scope of law, adopt different interest rates for different phases of the project depending on the risk characteristics and risk levels of the project in different stages.

Syndicated Loan

If multiple financial institutions participate in financing the same project, they should generally constitute a syndicate and jointly fund the investment. The Project Finance Guidelines do not, however, require financial institutions to carry out all project financing by means of syndicated loans, but use the word "in principle" to provide some flexibility.