Just saw this and haven’t digested it yet, but FYI:

CBRC recently released the risk management guidelines on merger and acquisition loans of commercial banks, permitting qualified commercial banks to make M&A loans. The guidelines aim to set standards for commercial banks’ M&A loans, encouraging banking institutions to explore innovative way through M&A financing to meet the increasing corporate borrowing needs.

M&A is an instrumental tool for companies to transform their business focus and to enter new industry and market. With M&A, they can expand products, enhance R&D capacity, utilize the redundant resources, acquire core technology, increase shareholder’s value, and deliver the scale of economy and synergies. In the process of large M&A, source of funds is the main problem, thus financing M&A has become an important business in the banking sector with a significant growth in recent 10 years.

Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines.

The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.

The guidelines are composed of four chapters and 39 clauses. Some are requirements like the buyer and the target corporate must be highly related in business and strategy, and though M&A, buyer could acquire R&D capacity, key technology, brand, license, supply and distribution network, or strategic resource to increase the competitiveness. Others are requirements on risk management and control with both general principles and quantitative regulatory standards in details.

The guidelines establish a clear principle that commercial banks’ management on M&A loans must be stronger than that on other loans. In making M&A loans, commercial bank has to professionally manage the entire lending process and set up sound internal controls incorporating detailed and comprehensive risk assessment and control procedures. In terms of quantitative standards, the ratios on risk concentration and large risk exposure, as well as leverage ratio are specifically provided.

Following the release of the guidelines, CBRC will closely track the M&A loans business, launch some research on related issues, and continuously improve the supervisory rules and procedures, in order to promote the sound and healthy development of M&A financing business. All these efforts are aiming at adjusting the industrial structure, enhancing the competitiveness of the banking industry, and facilitating the sound and balanced economic development.

We’ll have to take a look at this and see if anything is interesting or troubling. For the moment, talk amongst yourselves.

This entry was posted on Thursday, December 11th, 2008 at 7:22 pm and is filed under China Law. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.