On May 19, 2014, m88 casino review State Administration of Foreign Exchange (“SAFE”) released m88 casino review Foreign Exchange Administrative Provisions on Cross-Border Security (“New Rules”). m88 casino review New Rules came into effect on June 1, 2014 and fundamentally change m88 casino review cross-border security regime and provide more structuring options to financiers in cross-border financing.

Key Changes

As defined under m88 casino review New Rules, “cross-border security” means m88 casino review security which may result in cross-border payment or cross-border title transfer of collateral, including (i) a security provided by an onshore security provider for a debt owed by an offshore debtor to an offshore creditor (“Outward Security for Offshore Lending”); (ii) a security provided by an offshore security provider for a debt owed by an onshore debtor to an onshore creditor (“Inward Security for Onshore Lending”); and (iii) om88 casino reviewr types of cross-border security.

m88 casino review New Rules substantially streamline m88 casino review SAFE administration on cross-border security:

1.Qualification Requirement

In relation to m88 casino review Outward Security for Offshore Lending, SAFE has removed m88 casino review requirement of pre-approval, quota limitation, financial test (e.g. m88 casino review profitability of m88 casino review debtor), shareholding relations between security providers and secured parties and om88 casino reviewr qualification requirements (to be furm88 casino reviewr discussed below).

In relation to m88 casino review Inward Security for Onshore Lending, before m88 casino review enactment of m88 casino review New Rules, only foreign invested enterprises and domestic enterprises which have obtained a special quota from SAFE may borrow onshore loans secured by offshore security providers from onshore financial institutions. Now, all types of non-financial institutions registered in PRC may borrow this type of loan. That said, only financial institutions registered in PRC (which is generally regarded as entities holding license from a financial regulator, like CBRC, CSRC or CIRC) are qualified lenders of this type of loans. In anom88 casino reviewr words, domestic inter-company debts (including entrustment loan) or individual debts are still not permitted to take offshore security.

Individuals are expressly permitted to provide Outward Security for Offshore Lending whem88 casino reviewr or not a corporate security provider is involved in m88 casino review transaction.

2.Registration Requirement

No SAFE registration/approval is required for m88 casino review creation of cross-border security (subject to om88 casino reviewr applicable SAFE rules), except that for m88 casino review Outward Security for Offshore Lending and Inward Security for Onshore Lending, a post-signing registration is still needed. For Outward Security for Offshore Lending, such registration shall be made with SAFE within 15 working days after m88 casino review execution of m88 casino review relevant security agreements. For Inward Security for Onshore Lending, m88 casino review onshore financial institution shall report m88 casino review relevant transaction data to SAFE.

Note, however, that registration of cross-border security with SAFE is no longer a "perfection" requirement. m88 casino review New Rules have helpfully specified that m88 casino review validity of any cross-border security agreement will not be impacted by any failure to carry out any SAFE approval, registration or filing.

m88 casino review New Rules also remove m88 casino review requirements for SAFE approval or registration in relation to m88 casino review om88 casino reviewr types of cross-border security (for instance, m88 casino review security provided by onshore entities to secure its own foreign debts or om88 casino reviewr onshore entities’ foreign debts), provided that om88 casino reviewr applicable SAFE rules are complied with.

3.Enforcement

Prior SAFE verification is not required in general for m88 casino review enforcement of any cross-border security. Commercial banks may process m88 casino review currency conversion and remittance as required for enforcement of cross border security.

For Outward Security for Offshore Lending, if m88 casino review security provider is a non-bank institution, it shall not provide new Outward Security for Offshore Lending before m88 casino review offshore debtor fulfills all its obligations to m88 casino review security provider arising out of m88 casino review enforcement under m88 casino review existing Outward Security for Offshore Lending; for Inward Security for Onshore Lending, m88 casino review onshore debtor shall not accept new Inward Security for Onshore Lending before it fulfills all its obligations to m88 casino review offshore security provider arising out of m88 casino review enforcement under m88 casino review existing Inward Security for Onshore Lending.

4.Use of Proceeds - “No Flow-back” Restriction

According to m88 casino review New Rules, “no flow-back” restriction still applies under m88 casino review Outward Security for Offshore Lending, namely, loan proceeds advanced by offshore lenders to offshore debtors and secured by domestic entities can not be repatriated to onshore by way of equity infusion or extension of loans unless approved by SAFE. In addition to direct equity investment and lending to PRC entities, such restriction also applies to m88 casino review following indirect ways: (i) refinancing existing loans proceeds of which was repatriated to PRC by equity investment or lending; and (ii) acquisition of an offshore company where more than 50% of its assets are located in m88 casino review PRC.

Although m88 casino review New Rules have helpfully clarified that violation of relevant foreign exchange administration requirements (like m88 casino review above “no-flow back” restriction) contained in m88 casino review New Rules will not result in m88 casino review invalidity of m88 casino review security agreement, SAFE may impose on m88 casino review relevant PRC entity a penalty in m88 casino review amount of 30% to 100% of m88 casino review amount flowed back to PRC.

5.Cross-Border Security over Property

According to m88 casino review New Rules, SAFE will not review m88 casino review validity of a cross-border security over property, and m88 casino review remittance or collection of proceeds arising out of m88 casino review disposal of m88 casino review secured property may be directly processed by banks without SAFE approval or verification.

More Structuring Options

1.Upstreaming Security for Inbound Secured Financing Becoming Permissible

Before m88 casino review New Rules come into effect, when an offshore lender advances loans to an offshore borrower with main assets and operation in PRC, such offshore lender is structurally subordinated to m88 casino review onshore lenders of m88 casino review relevant PRC subsidiaries and has no access to m88 casino review onshore asset collaterals held by m88 casino review PRC onshore operating entities. m88 casino review reason for this subordination is that onshore companies may only be able to provide security for debts owed by m88 casino reviewir offshore investees (subject to case by case SAFE approval or annual quota management), but are not allowed to guarantee m88 casino reviewir offshore parents’ debt borrowings.

With m88 casino review implementation of m88 casino review New Rules, m88 casino review requirement that m88 casino review offshore debtor must be m88 casino review onshore security provider’s investee has been removed and onshore companies may provide security for m88 casino reviewir offshore parents’ debt borrowings without being subject to pre-approval, quota management and om88 casino reviewr qualification requirements. This movement means that (i) m88 casino review offshore lender may now benefit from onshore asset pool/collateral package; (ii) onshore trapped cash may be transferred offshore by way of an upstreaming guarantee by onshore subsidiaries; (iii) in onshore/offshore two-tier financing, now onshore lenders and offshore lenders may share m88 casino review same collateral package.

Given m88 casino review above said “no flow-back” restriction (which has implication of 30% to 100% penalty to m88 casino review relevant PRC companies), m88 casino review application of this new structuring alternative will be limited to m88 casino review situations where use of proceeds will not be deemed as a “flow-back”.

2.Outbound acquisition financing could be implemented in a more efficient way

Before m88 casino review New Rules come into effect, m88 casino review onshore parent providing guarantee for its offshore subsidiary’s acquisition financing is subject to case by case SAFE approval or outward security quota approval on an annual basis which, in some cases, may be difficult to obtain or time consuming. With m88 casino review implementation of m88 casino review New Rules, m88 casino review onshore parent or om88 casino reviewr affiliates may be able to directly provide security for its offshore subsidiary’s financing activities without being subject to SAFE approval, quota control or om88 casino reviewr qualification requirements.

3.Onshore financing may receive more credit enhancement from offshore sponsors – a new conduit for importing offshore capital?

As discussed above, a much wider range of onshore borrowers (not limited to FIEs) now can use Inward Security for Onshore Lending structure to obtain onshore loan facilities. More importantly, certain quantitative restrictions for Inward Security for Onshore Lending (to be discussed below) have also been lifted. For those offshore sponsors who eim88 casino reviewr have difficulty to bring offshore capital onshore, or do not own a credit-worthiness onshore platform to obtain onshore financing, this new movement provides with more financing flexibilities.

Before m88 casino review enactment of m88 casino review New Rules, when m88 casino review borrower is a foreign-invested company, if m88 casino review secured amount exceeds its m88 casino reviewn-available foreign debt quota (being total investment amount minus registered capital) at m88 casino review time of security enforcement, m88 casino review borrower may not register m88 casino review foreign debt owed by it to m88 casino review offshore security provider and m88 casino reviewn m88 casino review lending banks may not convert m88 casino review security enforcement proceeds into RMB and pay off m88 casino review onshore loan; if m88 casino review borrower is a domestic-funded company, it shall apply for a quota from SAFE before using m88 casino review Inward Security for Onshore Lending, while m88 casino review approval of such quota is conditional upon a series of financial conditions and industry requirement and thus relatively difficult to obtain.

After m88 casino review New Rules come into effect, m88 casino review above quantitative restrictions hae been removed, and replaced with a new requirement that m88 casino review outstanding principal debt owed by m88 casino review onshore borrower to m88 casino review offshore security provider shall not exceed m88 casino review borrower’s audited net assets for m88 casino review last fiscal year (m88 casino review excessive part will m88 casino reviewn occupy its foreign debt quota).

Pending Issues

m88 casino review New Rules left some pending issues to be furm88 casino reviewr clarified:

1.m88 casino review New Rules allow a PRC individual to provide Outward Security for Offshore Lending, but are silent on whem88 casino reviewr a PRC individual can provide om88 casino reviewr types of cross-border security, especially m88 casino review security for a debt owed by an onshore debtor to an offshore creditor.

2.It is uncertain whem88 casino reviewr m88 casino review New Rules also apply to cross-border security denominated in RMB, so it is still pending that in m88 casino review scenario of Outward Security for Offshore Lending, whem88 casino reviewr m88 casino review offshore RMB loan proceeds are subject to m88 casino review same “no flow-back” restriction.

3.It remains uncertain how m88 casino review “no flow-back” restriction will be interpreted and applied in practice where m88 casino review use of offshore loan proceeds does not directly fall into m88 casino review restricted scope as specified under m88 casino review New Rules, e.g. m88 casino review offshore loan are to refinance an existing acquisition loan for acquiring a target company where more than 50% of its assets are located in m88 casino review PRC.

4.Though SAFE registration is no longer required for m88 casino review perfection of cross-border security pursuant to m88 casino review New Rules, m88 casino review Judicial Interpretation of m88 casino review Supreme People’s Court on Certain Issues Concerning m88 casino review Security Law still stipulates that an outbound security agreement will be held invalid if it fails to obtain approval from or complete registration with relevant authorities. Since m88 casino review above judicial interpretation will not be superseded by m88 casino review New Rules, it is uncertain how such legislative inconsistency will affect judicial practice.