The China Banking and Insurance Regulatory Commission is seeking public opinions on the draft guidelines for commercial bank merger loans.

According to the news from the China Banking and Insurance Regulatory Commission on August 20th, the China Banking and Insurance Regulatory Commission is soliciting opinions on the "Management Measures for Commercial Bank Merger and Acquisition Loans (Draft for Solicitation of Opinions)". It mentioned that equity participation M&A loans refer to loans that support a single acquiring party to participate in the target company without achieving control of the target company. However, the acquired equity stake must not be less than 20% in a single transaction. If a single acquiring party already holds 20% or more of the target company's equity and wants to further increase its stake in the target company without achieving control, they can apply for equity participation M&A loans, but the percentage of acquired or subscribed equity must not be less than 5% in a single transaction. The original text: Management Measures for Commercial Bank Merger and Acquisition Loans (Solicitation of Opinions Draft) Article 1 In order to regulate the business operations of commercial bank merger and acquisition loans, improve their risk management capabilities, and strengthen support for economic restructuring and resource optimization, this measure is formulated in accordance with the "People's Republic of China Banking Supervision Law", "People's Republic of China Commercial Bank Law" and other laws and regulations. Article 2 This measure applies to commercial banks established legally within the territory of the People's Republic of China. Article 3 The merger and acquisition loans referred to in this measure are loans provided by commercial banks to domestic acquiring companies or their subsidiaries for the purpose of paying the acquisition transaction price (including transaction costs). The term "subsidiary" mentioned in the preceding paragraph refers to a fully-owned or controlling subsidiary mainly engaged in investment management by the acquiring party. Article 4 Merger and acquisition loans are used to support domestic acquiring companies in acquiring control, merging, or participating in established and ongoing target enterprises or assets through methods such as acquiring existing equities, subscribing for new equities, acquiring assets, or assuming debt. According to the purpose, they are classified into control-type merger and acquisition loans and equity participation-type merger and acquisition loans: (1) Control-type merger and acquisition loans refer to loans that support the acquiring party in obtaining control of the target enterprise or assets. An acquiring party that has obtained control of the target enterprise and acquires or subscribes to the target enterprise's equity to maintain or enhance control can apply for control-type merger and acquisition loans. The acquiring party mentioned in the preceding paragraph can be a single acquiring party or multiple acquiring parties with consistent action relationships. (2) Equity participation-type merger and acquisition loans refer to loans that support a single acquiring party to participate in the target enterprise without achieving control of the target enterprise, but the percentage of acquired equity in a single transaction must not be less than 20%. If a single acquiring party already holds 20% or more of the target company's equity and wants to further increase its stake in the target company without achieving control, they can apply for equity participation-type merger and acquisition loans, but the percentage of acquired or subscribed equity must not be less than 5% in a single transaction. Article 5 The legal entities of commercial banks engaging in merger and acquisition loan business should meet the following conditions: (1) Good operating condition and sound corporate governance; (2) Professional teams engaged in due diligence and risk assessment for merger and acquisition loans; (3) Good supervision ratings in the previous year, with major supervision indicators meeting regulatory requirements; (4) At the end of the previous year, the adjusted balance sheet total assets should not be less than RMB 50 billion, and for those engaging in equity participation-type merger and acquisition loan business, the adjusted balance sheet total assets should not be less than RMB 100 billion at the end of the previous year. Before commercial banks engage in merger and acquisition loan business, they should establish corresponding business processes and internal control systems and file records with the National Financial Supervision and Administration Commission or its branches. Article 6 Commercial banks should establish sound merger and acquisition loan management mechanisms and information systems, formulate merger and acquisition loan management policies and procedures, effectively identify, monitor, evaluate, mitigate, and control merger and acquisition loan risks. Article 7 Commercial banks engaging in merger and acquisition loan business should adhere to the principles of legal compliance, prudent operation, controllable risks, and sustainable business. Article 8 Commercial banks accepting merger and acquisition loan applications should meet the following basic conditions: (1) The acquiring party operates legally and compliantly, with good credit standing and no bad records such as credit defaults, evasion of bank debts, etc. in the past three years; (2) The target enterprise or assets should have good commercial value and be able to bring reasonable economic returns to the acquiring party; (3) There should be a high degree of industrial relevance or strategic synergy between the acquiring party and the target enterprise, which contributes to integration and restructuring, optimization of industrial layout, or transformation and upgrading towards new quality productivity; (4) For merger transactions involving national industrial policies, industry access, anti-monopoly, transfer of state-owned assets, etc., approval from relevant authorities and fulfillment of related procedures should be in accordance with relevant laws, regulations, and policies. Article 9 The professional team responsible for due diligence and risk assessment of commercial bank merger and acquisition loans should investigate, analyze, and evaluate the contents from Article 10 to Article 19 of this measure and form a due diligence report. The head of the professional team mentioned in the preceding paragraph should have more than three years of experience in M&A, and members should include but not be limited to M&A experts, credit experts, industry experts, legal experts, and financial experts. The head of the equity participation-type merger and acquisition loan professional team should have more than five years of experience in M&A. Article 10 Commercial banks conducting due diligence should cover all relevant information of the acquiring parties and targets, including but not limited to the commercial value, potential returns, valuation levels of the target enterprise or assets, shareholder structure of the acquiring parties, corporate governance, operational conditions, financial situations, overall credit ratings, compliance of the M&A transactions, etc. If there is guarantee involved, a comprehensive investigation should be conducted on the guarantor's guarantee capacity, the value of the pledged collateral, etc. Article 11 Commercial banks should conduct a comprehensive assessment of the risks of M&A loans based on various risks related to mergers and acquisitions, such as strategic risks, legal and compliance risks, integration risks, operational and financial risks, etc. The focus should be on assessing the borrower's repayment capability while also considering the development prospects, synergistic effects, and operational benefits of the target enterprise after the acquisition, and conducting a comprehensive evaluation of the impact on the M&A loan. If cross-border transactions are involved, country risks, exchange rate risks, fund remittance risks, etc. should also be analyzed. Article 12 Commercial banks should assess the borrower's repayment ability by considering various financial indicators, including but not limited to profitability, asset quality, asset-liability structure, cash flow situation, etc. Commercial banks should also analyze and evaluate non-financial factors of the borrower, including but not limited to corporate governance, performance records, production equipment and technological capabilities, products and markets, industry characteristics, as well as the macroeconomic environment to ensure that the borrower has good repayment capabilities and willingness. Article 13 When evaluating strategic risks, commercial banks should analyze various aspects such as operational strategies, management teams, and synergies between the merging parties, including but not limited to: (1) The industry relevance and strategic synergy between the merging parties and the possible synergies that may be formed, the expected strategic effects, and opportunities for additional returns; (2) The possibility for the new management team after the merger to achieve new strategic goals; (3) Risk control measures or exit strategies that merging parties may take if synergies are not realized. Article 14 When evaluating legal and compliance risks, commercial banks should consider aspects such as: (1) Whether the parties to the M&A transaction have the qualifications as M&A transaction parties, whether they have obtained or will obtain approvals according to relevant regulations, and have completed necessary registrations, announcements, etc., and whether the transaction is legally effective; (2) The source of funds for the borrower to pay the acquisition price, and whether the control of repayment cash flow is legal and compliant; (3) The compliance of other aspects related to the legal structure of the M&A transaction and M&A financing. Article 15 When evaluating integration risks, commercial banks should analyze whether the merging parties have the capability to achieve synergies through integration in areas such as: (1) Development strategy integration; (2) Organizational, human resources, and cultural integration; (3) Business integration; (4) Asset integration. Article 16 When evaluating operational and financial risks, commercial banks should consider aspects such as: (1) The main risks in post-merger operations, such as whether industry development and market share can be maintained or increased, the effectiveness of corporate governance, stability and capacity of the management team, technological maturity and competitiveness, effectiveness of financial management, etc.; (2) The future cash flow and its stability of the merging parties, dividend policy, and their impact on the repayment of the M&A loan; (3) The risk of pricing the M&A equity (or assets) higher than the reasonable valuation of the target enterprise's equity (or assets). Article 17 Commercial banks should establish a prudent financial model based on a comprehensive analysis of various risks related to mergers and acquisitions, the operating and financial conditions of the merging parties, the M&A financing methods and amounts, etc., to calculate the future financial data of the merging parties and the key financial leverages and debt repayment capacity indicators that have a significant impact on M&A loan risks. Article 18 Based on the financial model calculation, commercial banks should conduct scenario analysis, fully considering the impact of various adverse scenarios on M&A loan risks. Adverse scenarios include but are not limited to: (1) Economic downturn, industry-specific concentrated defaults, credit rating downgrades of the merging parties, etc.; (2) The operating performance (including cash flow) of the merging parties cannot maintain a stable or growing trend during the repayment period; (3) The failure to achieve synergy between the merging parties after the acquisition. Article 19 If there are related relationships between the acquiring parties and the target enterprise, commercial banks should strengthen pre-loan investigations to understand and grasp the economic motives of the M&A transaction, the feasibility of integration between the merging parties, the possibility of synergy effects, and other related information. They should verify the authenticity of the M&A transaction and the reasonableness of the M&A transaction price to prevent related companies from using fake M&A transactions to embezzle bank credit funds. Article 20 Commercial banks should generally require borrowers to provide guarantees that cover the risks of M&A loans, including but not limited to asset mortgages, equity pledges, and other forms of guarantees that comply with legal requirements. When pledging equity in the target enterprise, commercial banks should adopt a more cautious method to evaluate the equity value and determine the pledge ratio. Article 21 Based on a comprehensive due diligence and risk assessment, commercial banks should confirm the authenticity of the M&A transaction and the reasonableness of the application for M&A loans, comprehensively judge the borrower's repayment ability and the profitability of the enterprise after the merger, and form a loan approval opinion. Article 22 Commercial banks should carefully determine the basic terms of the loan contract, such as the loan amount, term, interest rate, installment repayment plan, and collateral methods, based on the risk assessment of the M&A loans. Article 23 Commercial banks should include key clauses in the loan contract to protect their interests, including but not limited to: (1) Borrowers are obligated to regularly submit financial statements of the merging parties, guarantors, and other documents required by commercial banks, and continually meet the binding terms of important financial indicators of the borrower to commercial banks; (2) Commercial banks have the right to be informed or approved of significant changes related to equity, operations, finance, and investment matters of the merging parties, and have the right to take risk control measures in the case of significant adverse changes; (3) The withdrawal conditions and use of funds for M&A loans, as well as measures necessary for commercial banks to monitor the flow of funds, such as account monitoring and voucher collection. Article 24 Commercial banks should comprehensively consider the risks of M&A transactions and M&A loans, prudently determine the proportion of M&A loans to the M&A transaction price, ensure a reasonable proportion of equity funds in the M&A funds, and prevent risks of highly leveraged M&A financing. The proportion of control-type M&A loans to the M&A transaction price should not exceed 70%, and the proportion of equity funds in the M&A transaction price should not be less than 30%. The proportion of equity participation-type M&A loans to the M&A transaction price should not exceed 60%, and the proportion of equity funds in the M&A transaction price should not be less than 40%. Article 25 The term of control-type M&A loans should not exceed ten years in principle, and the term of equity participation-type M&A loans should not exceed seven years in principle. Article 26 Before loan disbursement, commercial banks should confirm that the borrower meets the withdrawal conditions specified in the contract. If the borrower applies for M&A loans to pay the M&A transaction price, a trust payment method should be adopted. The withdrawal conditions should at least include other funds for the M&A transaction being fully in place, compliance conditions for the M&A transaction being met, etc. Article 27 M&A loans can be used to replace the M&A price paid by the acquiring party in advance, but not to replace already acquired M&A loans. The interval between the loan processing time and the completion of payment for the M&A transaction price to be replaced should not exceed one year. Article 28 Commercial banks should strengthen post-loan fund management, track the progress of M&A implementation in a timely manner, pay close attention to the fulfillment of key terms in the loan contract, monitor risk factors affecting the borrower's debt repayment capacity, guard against fund embezzlement by the borrower, and related companies exploiting fake M&A transactions to borrow loan funds. If anomalies are found, measures should be taken promptly, such as early loan recovery, additional guarantees, adjustments to loan disbursement conditions or repayment plans, freezing or terminating credit lines, etc. Article 29 The total balance of all M&A loans of commercial banks should not exceed 50% of the net primary capital of the same period. The balance of equity participation-type M&A loans should not exceed 30% of the total balance of all M&A loans of the bank. Article 30 Commercial banks should establish corresponding quota control systems for the concentration of M&A loans based on the business development strategy of M&A loans, separately for individual borrowers, group clients, industry categories, countries, or regions. For individual borrowers, the balance of M&A loans should not exceed 5% of the net primary capital of the same period. Article 31 The China Banking and Insurance Regulatory Commission and its branches, according to the operations and management of commercial banks, risk levels, and the development of M&A loan business, may propose prudent regulatory requirements for the management of commercial bank M&A loans. If a commercial bank is found to have violated the conditions for opening its business or regulations of this measure, and cannot effectively control the risks of M&A loans, regulatory measures or administrative penalties may be taken in accordance with relevant laws and regulations. Article 32 Policy banks, foreign bank branches, and enterprise group financial companies that engage in M&A loan business shall comply with this measure. Article 33 This measure is interpreted by the China Banking and Insurance Regulatory Commission. This measure shall be implemented from the date of issuance. The "Circular of the China Banking Regulatory Commission on Issuing the " (CBRC No. 5 [2015]) is simultaneously abolished. This article is compiled from the China Banking and Insurance Regulatory Commission, GMTEight Editor: Chen Wenfang.