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1、1/17 Document Information Document Name Credit&Finance Drafting Considerations Chapter Credit&Finance Language This document was originally drafted in Chinese.Disclaimer While reasonable care is taken to ensure the accuracy and completeness of the publication,The Chapter Editor makes any representat
2、ions or warranties,express or implied,that the publication is free from errors or omissions.This document is based upon the Editors experience only,and should be used for general reference purposes only.Specific and detailed professional advice should always be obtained in relation to any proposed l
3、egal agreement.This document should not be relied upon as a substitute for legal or other professional advice.Document Number CC01 Release Number and Date Release 3 December 2008 1/17 CREDIT AND FINANCE DRAFTING CONSIDERATIONS 1.INTRODUCTION This chapter is concerned with a variety of aspects of bor
4、rowing and lending and includes a range of documentation from basic lender commitments to security and guarantees.With the exception of Document 4“Loan Agreement Short Form”(which does not contain standard representations and warranties and performance covenants)and Document 7“Comfort Letter”,the do
5、cuments are prepared from the perspective of protection and preservation of the rights of the lender and not of the borrower.The documentation may be modified for use in connection with direct foreign currency loans or foreign exchange loans in the PRC.Where PRC law applies to the transaction,specif
6、ic regard should be had to the various legislation in China relating to borrowing and lending.2.RELEVANT LEGISLATION AND REGULATIONS In entering into any contracts in the PRC,the parties should,of course,have regard to terms of the Contract Law of the Peoples Republic of China.Of particular signific
7、ance in the PRC Contract Law is Article 12,which permits the content of a contract to be determined,for the most part,by the parties to it.Also significant is Artic le 126,which provides that parties to a“foreign-related contract”may choose those laws applicable to the settlement of contact disputes
8、 arising from the contract unless otherwise stipulated by law.Importantly,however,Article 123 affirms the principle that where other PRC laws stipulate otherwise on contracts,the provisions of those laws shall prevail.Accordingly,it is important to consider all PRC legislation possibly impacting on
9、the instrument in question to ensure that form and,where applicable,registration requirements,of the law have been complied with.In the following document descriptions,the following legislation is discussed and emphasised:The Contract Law of the Peoples Republic of China(adopted at the Second Sessio
10、n of the Ninth National Peoples Congress on 15 March 1999)the“Contract Law”;The Commercial Banking Law of the Peoples Republic of China,1995(adopted at the Thirteenth Session of the Standing Committee of the Eight National Peoples Congress on 10 May 1995;promulgated by Order No.47 on 10 May 1995)the
11、“Banking Law”;and 2/17 The PRC Security Law(adopted at the Fourteenth Session of the Standing Committee of the Eighth National Peoples Congress and promulgated on 30 June 1995;effective as of 1 October 1995)the“Security Law”.Of this legislation,the PRC Security Law in particular has paved the way fo
12、r a variety of different forms of lending instruments by which financial institutions can secure monies owing to them and manage the attendant risks in connection with loans granted by them.You should also be aware of the“Foreign Debt Administration Tentative Procedures”which came into effect on 1 M
13、arch 2003.These provide a general code with respect to foreign borrowing including by both sovereign and non-sovereign entities.The procedures include guidelines concerning how generally foreign funding is to be used including,at Article 23,a statement that foreign debt funds are to be used mainly f
14、or economic development and structure adjustments of the balance of foreign debts.Also importantly,Article 40 provides that where a domestic institution that borrows foreign funds or has provided external security for it fails to obtain the required approvals,any external lending contract or securit
15、y contract executed is deemed not to have any legal binding effect.Finally,a cautionary note.The types of financing facilities available and law and regulation relating to them are constantly expanding and being revised in the PRC.Accordingly,practitioners should be aware of and concern themselves w
16、ith any changes in such laws as they occur.3.DOCUMENT INTRODUCTIONS The model contracts in the chapter are described below.Included for the more substantial contracts is a discussion of the fact pattern,assumptions and key provisions of the contracts.3.1 Commitment Letter Additional Facility(CC02)Th
17、is precedent commitment letter and accompanying term sheet contemplates provision of an additional loan facility,specifically a non-revolving credit facility,pursuant to an existing loan contract.The precedent can be modified for use for a number of currencies and for a number of purposes.Included i
18、n the term sheet is provision for bankers acceptances and documentary credits which are discussed in greater detail under the document description for Item 5“Loan Agreement Long Form”.3.2 Commitment Letter Long Form(CC03)3/17 This precedent contemplates funding for an acquisition financing and offer
19、s a range of facilities,specifically an unspecified currency loan facility and U.S.Dollar term loan facility,combined with an acquisition of an equity interest in the borrower,as may occur with many substantial project loans.The commitment letter also contemplates a number of co-arrangers.The covena
20、nts contained in this commitment are sophisticated and unlikely to suit every circumstance,even in the context of a“standard”project loan.In addition,certain restrictions related to the granting of such loans by foreign parties may apply.These are more fully spelled out in the document descriptions
21、for Item 4“Loan Agreement Short Form”and Item 5“Loan Agreement Long Form”below.3.3 Loan Agreement&Promissory Note Short Form(CC04)This simple form of loan agreement is representative of those often-used in lending transactions in China.It contemplates a basic form of term loan denominated in U.S.Dol
22、lars.The agreement may be significantly deficient from a lenders point of view as it lacks representations and warranties and performance covenants other than default from non-payment.Under PRC law,the parties must have regard for the Banking Law,which introduces some form requirements into lending
23、transactions.Specifically,under Article 37 of the Banking Law,commercial banks in making loans are required to enter into written lending contracts.Such contracts must stipulate the type,purpose,amount and interest rate of the loan,any repayment terms,the method of repayment,liability for breach of
24、contract and other matters deemed necessary by the parties.Outside of the ambit of these formal requirements,the parties are allowed a great deal of leeway in their contracts.As regards interest,however,they should have regard to Article 38 of the Banking Law which stipulates that banks may determin
25、e loan interest rates within upper and lower limits specified by the Peoples Bank of China(the“PBOC”).The Provisional Regulations on Interest Rate Control promulgated on 11 December 1990 by the PBOC give the bank a wide scope in determining such rates from time to time,including penalty interest rat
26、es.In addition to the form requirements provided in the Banking Law,foreign exchange loans are subject to certain additional foreign debt registration requirements which are,for the most part,contained in the“Tentative Provisions of the State Administration of Foreign Exchanges(SAFE)Monitoring of Fo
27、reign Debts Statistics”(the“Debt Registration Regulations”)and the Foreign Exchange Control Regulations.Under the Debt Registration Regulations and their Implementation Rules,banks are prohibited from opening a foreign exchange account or debt servicing account for a borrower 4/17 unless that borrow
28、er has obtained a Foreign Debt Registration Certificate.In the absence of such certificate,no payments of principal or interest can be remitted abroad.SAFE has issued an opinion on the implementation of its guidelines and circulars relating to registration(Opinion on The Implementation of the“Furthe
29、r Strengthening the Monitoring of Foreign Debts Statistics Circular”).This opinion provides specific rules relating to the requirements for Chinese language versions of loan contracts and also provides that a loan agreement subject to foreign debt registration must contain the following provision:“A
30、fter the signing of the loan agreement,the borrower shall undertake foreign debt registration procedures at the SAFE in accordance with the requirements under Article 24 of Chapter 3 of the PRC Foreign Exchange Control Regulations promulgated on 29 January 1996.The registration document issued by SA
31、FE shall be one of the essential legal documents for the loan agreement.”3.4 Loan Agreement Long Form(CC05)In considering this precedent,in addition to the specifics relating to the subject lending transaction,you should consider the form and registration requirements regarding foreign exchange loan
32、s discussed in the document description for Item 4“Loan Agreement Short Form”.Not all of the facilities contemplated here may be available in a purely PRC-based loan.This agreement is drafted from a Lenders perspective.The Borrower has three different methods for obtaining credit under these facilit
33、ies:(i)loan advances,(ii)bankers acceptances,and(iii)documentary credits.The Borrower agrees to give the Lender security over all its assets to secure the credit facilities.In addition,credit support(by way of guarantee,security or other appropriate methods)for the Borrowers obligations under the Cr
34、edit Agreement is to be provided by“Restricted Subsidiaries”,as described in the precedent.(1)Types of Credit Facilities Under Article 2,the Lender agrees to provide the Borrower with an“Operating Facility”and a“Term Facility”and the Cash Management Lender agrees to provide a“Swingline Facility”.The
35、se types of loans are used by the Borrower for different purposes,and as a result,different terms and conditions apply to each facility.Article 2 sets out the aggregate maximum amount which the Lender commits to provide under each facility,the purposes for which funds drawn under each facility are t
36、o be used,the basic repayment provisions for each facility,and the fees payable by the Borrower to the Lender for making the facilities available.5/17(i)Operating Facility Under the Operating Facility,the Lender agrees to provide funds(up to a specified amount)to the Borrower over a period of time.T
37、he Borrower may obtain funds at any time and may repay and reborrow these funds over time.This type of facility is a“revolving”loan.Borrowers typically use this facility to finance ongoing business operations.For example,a Borrower might make a draw under this facility to finance the acquisition of
38、inventory,make repayments as it receives cash through collection of accounts receivable from the sale of the inventory,and then reborrow funds to finance a new inventory acquisition.Traditionally,a Lender will look to the Borrowers inventory and accounts receivable in deciding how much credit to com
39、mit under this facility,and will expect a first charge over inventory and accounts receivable to secure this loan.(ii)Term Facility Under the Term Facility,the Lender agrees to provide the Borrower with a specified amount on the Closing Date.This amount is repayable at a designated maturity date in
40、the future,and when it is repaid,it may not be reborrowed.Borrowers typically use this type of facility to make capital acquisitions,such as the acquisition of real property.A Lender will generally look to the value of the property being acquired and the Borrowers other fixed assets in deciding how
41、much to lend under this facility,and will require a first charge over fixed assets to secure this loan.(iii)Swingline Facility Under the Swingline Facility,the Lender agrees to provide funds to the Borrower on an overdraft basis for day-to-day cash needs.The Swingline Facility can be a carve-out of
42、the Operating Facility or can be a separate Facility which has attributes similar to the Operating Facility.In this Agreement it is drafted as a separate Commitment.(2)Methods of Making Facilities Available Articles 3 through 5 set out the methods by which the Borrower may obtain funds under each cr
43、edit facility.As Borrowers and money markets become more sophisticated,Borrowers want the option of obtaining funds at the lowest cost available at the time of borrowing,and thus a Borrower will typically use a combination of these methods in order to get the best credit 6/17 rate at any given time.
44、The different methods of obtaining credit are also commonly referred to as“facilities”but should not be confused with the two basic types of credit facilities,the Operating Facility and the Term Facility.The three methods of drawing on the facilities appearing in Articles 3 through 5 are the most co
45、mmonly used.These methods comprise loan advances,bankers acceptances and documentary credits,which are collectively referred to as“Accommodations”.Although(as described below)these methods of granting credit are conceptually and mechanically different,all are methods where funds are made available t
46、o the Borrower and where the Lender puts itself at risk in some manner for a corresponding amount.In some cases,one method of obtaining credit may not be available for certain facilities.You will have to review your underlying term sheet to determine what types of Accommodations are available under
47、each facility.(i)Loan Advances Article 3 provides that the Borrower may obtain credit from the Lender by way of loan Advances.This is the simplest type of credit facility,a loan in cash from the Lender to the Borrower on which the Borrower pays interest,and is in practice the most commonly used.The
48、terms are somewhat complicated,however,as the Borrower is given a number of options with respect to the Advances it obtains.The Borrower can request that an Advance be made in U.S.Dollars or another currency or currencies,to be stipulated.In addition,depending on the currency of the Advance the Borr
49、ower chooses,the Borrower may choose the interest rate which will apply to the Advance from a number of different interest rate options.A.U.S.Dollar Advances Base Rate Advances:The Borrower may choose to borrow Base Rate Advances,which are Advances in U.S.Dollars bearing interest at a rate which is
50、the higher of(y)a“U.S.Base Rate”,or prime rate for loans in U.S.Dollars;or(z)the daily cost of funds in the United States.This is a floating rate of interest.LIBOR Rate Advances:The Borrower also has the option of paying interest on its U.S.Dollar Advances at the LIBOR Rate(sometimes referred to as“