Untested options

In the past few years many investors have provided pre-IPO loans to PRC businesses (mainly in the PRC real estate sector) through the offshore holding companies of those PRC businesses. This was driven by a number of market factors, including (a) the low financing costs of borrowing US dollars offshore in comparison to borrowing onshore (and the appreciation of the renminbi); (b) the attractive returns to the lenders in the event of a successful IPO (which were often equity-like); (c) the ample liquidity in the PRC debt and equity markets reducing the risk of an IPO failing to list by a specified date; and (d) demand by companies in the PRC seeking funds to finance plans for rapid expansion in the booming economy and hot property market.

The pre-IPO financings were structured to achieve equity-like returns through the issuance of warrants or rights to acquire the shares at a pre-determined...