Dentons advises on the first debt-to-preference share swap deal of a non-listed non-public company in China

On December 19, 2018, BOC Financial Assets Investment Co., Ltd. (BOC FAI) officially launched the debt-to-preference share swap deal for Guizhou Zhongshui Energy Co., Ltd. (a subsidiary of the State Power Investment Corporation). This deal is the first debt-to-preference share swap of a non-listed non-public company in China since the introduction of the Notice on the Specific Policy Issues concerning the Implementation of the Market-Oriented Debt-Equity Swaps of Banks (jointly issued by the National Development and Reform Commission, the People's Bank of China, the Ministry of Finance and other Ministries and Commissions). A Dentons Beijing team led by senior partner Wang Lihong, assisted by partners He Yuhua and Wang Xinsheng, and Li Yuan, Pan Yaoyao, Li Shengyu and Tu Mengyu, provided a full scope legal assistance on this deal.

The market-oriented debt-equity swap is an important measure for the state to deepen supply-side structural reforms and reduce corporate leverage. For the issuer of the preferred stock, the issuance will not dilute the proportion of the original common stockholders' equity, and profits will only be distributed when the company is making profits, so such deal can ease the short-term liquidity pressure while reducing leverage. For the investors, the preferred stock has a pre-determined rate of dividends, which does not fluctuate with the actual operations of the company; the preferred stockholders can distribute the after-tax corporate profits before the common shareholders, and if the company goes bankrupt and liquidated, preferred shareholders will rank before ordinary shareholders when it comes to receiving payment.

BOC FAI, which led this deal, is one of the first commercial bank debt-equity swap implementation institutions in China and a wholly-owned subsidiary of Bank of China. Since its inception, BOC FAI has been focused on market-oriented debt-equity swap, financial advisory and fund management businesses, dedicated to helping companies reduce leverage and coordinate structure. Relying on the advantages of the diversified platform of BOC Group, the company is committed to provide customers with a package of financial services.