Chinese financing: how will China restructure concession and commercial loans?

Out-Law Analysis | 25 Aug 2020 | 4:13 pm | 3 min. read

The vast majority of loans made to African nations by Chinese lenders since the introduction of the 'Going Out' policy in 1999 were concession and commercial loans.

Unlike China's Ministry of Commerce (MOFCOM), which has a well-established history of cancelling zero-interest loans, Chinese lenders have never, as far as we are aware, agreed to debt cancellations.

Of the $148 billion worth of loans made by Chinese lenders between 2000 and 2018 following the announcement of the 'Going Out' policy in 1999, the Export-Import Bank of China (CEXIM) accounted for $86bn. The China Development Bank (CDB) accounted for a further $37bn.

In May 2020, in response to an agreement to support the world's poorest countries during the coronavirus pandemic, China and the G20 announced debt relief for 77 developing countries, including 40 in sub-Saharan Africa. We have already discussed how China is likely to approach the restructuring of zero-interest loans. For more on the different types of Chinese financing, see our Out-Law guide - Chinese financing: banking with Chinese lenders.

Restructuring concession and commercial loans

There are a large number of well-documented cases of Chinese loans being restructured or refinanced including loans involving Angola, Mozambique, Cameroon, Zimbabwe, Niger, Ethiopia, the Republic of Congo, Djibouti, Benin, Sudan and Chad. This does not take into account the large-number of non-formal restructurings such as waivers, amendments and covenant adjustments that have also taken place, the largest to date being the $7.5bn refinancing of Angola's state-owned enterprise Sonangol.

Kanyi Lui

Kanyi Lui

Partner

When loans are stressed, borrowers should inform and engage with the lender in a proactive and transparent manner. As a contractual matter, all defaults could in theory result in a declaration of default and acceleration of the debt – however, not all defaults are equal.

According to the Centre for Global Development (CGD), prior to 2012 rescheduling and restructuring of Chinese lending averaged $52 million per case. After the 2015 commodity price collapse, the average jumped to $1bn per case.

When loans are stressed, borrowers should inform and engage with the lender in a proactive and transparent manner. As a contractual matter, all defaults could in theory result in a declaration of default and acceleration of the debt – however, not all defaults are equal.

Assuming a good repayment history and relationship, most Chinese lenders will be flexible in accommodating waiver requests in cases of minor or technical default - for example, delivering audited financial statements a few days late; or being the subject of a frivolous lawsuit. Requests for relaxation of covenants - for example, loosening financial covenants or debt service reserve requirements - may also be granted where a good commercial justification exists.

However, payment defaults are always considered to be extremely serious by Chinese lenders. Many Chinese lenders have internal systems and policies in place which automatically escalate payment defaults internally, imposing additional approval requirements and curtailing the options available.

Unlike MOFCOM's zero-interest loans, loans provided by Chinese banks are not funded from the government budget and any failure to pay will directly impact on the bank's balance sheet. Bad loans can also impact on the prospects of the individual relationship banker.

In our experience, where a restructuring proposal is presented early and in the absence of any payment default, Chinese lenders and individual bankers are generally motivated to work flexibly with the borrower to avoid payment default. Internal approvals can be expedited where the restructuring does not touch on the original credit approval or affect the terms of the original credit such as facility size, interest, repayment or maturity date. Proposals presented after a payment default are subject to a much more formal process which could involve extensive discussions and multiple layers of approvals, as well as requirements for credit support or covenants.

Where a loan benefits from Sinosure export insurance, Sinosure could potentially provide up to 95% cover for losses incurred through commercial or political risks. In such cases, Sinosure will be subrogated to the rights of the lenders, and Sinosure's approval for any restructuring or refinancing discussions must be obtained. In the absence of an agreed settlement, Sinosure is obliged to pursue the borrower and exhaust all available options for recovery, even where the cost of recovery might far outweigh the amount that could potentially be recovered.

Debt to equity swaps

China introduced a programme of debt-to-equity swaps in 2016 as a way of encouraging Chinese companies to reduce debt. The programme has generated a lot of interest, with RMB 1.4 trillion (approx. $200m) worth of debt-to-equity swaps completed in 2019 according to China's banking and insurance regulator, the China Banking and Insurance Regulatory Commission.

Although we have seen a number of non-Chinese borrowers propose debt-to-equity swaps as part of restructuring discussions, none have to our knowledge been accepted by Chinese lenders. As such, the programme appears to be mostly limited to Chinese domestic borrowers - primarily state-owned enterprises - for the time being.

Asset seizures

China's lease of Sri Lanka's Hambantota Port in 2017 for $1.12bn over a period 99 years received extensive media coverage, with some reporters going as far as to claim that China had "seized a strategic seaport in Sri Lanka as collateral".

Deborah Brautigam of Johns Hopkins University has flatly stated that this was not an "asset seizure". Mainstream media reports did not include a number of relevant facts including that the ownership of the port remained with the Sri Lanka government; that Chinese loans comprised of less than 10% of Sri Lanka's foreign debt obligations; and that a large portion of the lease payments have been used to repay non-Chinese lenders.