SECTION 1: Market overview
1.1 Please provide an overview of the cross-border
financing market in your jurisdiction.
As an international financial centre Hong Kong enjoys many
advantages, not least its strategic geographical position as a
major hub and gateway to Mainland China and its well-regarded
common law legal system and independent judiciary. Its bank and
bond markets are among the deepest, most liquid and most mature
in the Asia-Pacific region, and operate under effective and
transparent regulations which meet international standards.
Bank liquidity through 2016/2017 has remained
characteristically strong, with interest rates low, keeping
syndicated loan volumes in Hong Kong at healthy levels despite
turbulence in the global markets and the general slow-down in
pan Asia-Pacific cross-border financing activity.
While the bank term loan market continues in general to
feature lower leverage, higher amortisation and tighter
maintenance-based covenants than the US term loan B market,
practice in this area is gradually converging.
US/European-style leveraged finance has also gained popularity,
with market participants making increased use of leveraged
finance structures such as covenant-lite loans and bridge to
high-yield bonds for acquisitions. We have also seen a number
of leveraged transactions incorporate LMA-style 'certain funds'
(vs. US-style SunGard) terms, even in transactions based in
markets more generally familiar with US practice (for example
Hong Kong's largest banks in terms of total assets are HSBC
and Bank of China (Hong Kong). Bank of China also led the
1H2017 mandated lead arranger tables for Asia (excluding Japan
and Australia), with HSBC and DBS Bank taking joint second
1.2 What have been the key trends or developments in
cross-border financing in your jurisdiction over the past 12
Syndicated loan volumes across Asia-Pacific (excluding
Japan) fell to a five-year low of $184 billion in 1H2017,
weighed down by the slowdown in Chinese outbound M&A (which
was the biggest driver behind the acquisition finance boom in
2016). Although M&A financing activity in Hong Kong was
also constrained, an increase in the number of refinancing
transactions helped ensure that loan volumes in the territory
remained at healthy levels. We expect this trend to continue
given estimates which point to high volumes of offshore PRC
debt maturing in 2017.
The ever-closer ties between the Hong Kong and Mainland
China financial systems and economies was another significant
theme, with Hong Kong banks' Mainland China exposure rising to
29.3% of system-wide assets in March 2017 (up from 27.3% in
December 2016). Fitch Ratings expects a further increase in
lending to the Mainland in 2017 as tightening onshore liquidity
conditions add incentives for Chinese companies to borrow
offshore. Notably, Moody's Investor Services downgraded Hong
Kong's credit rating from Aa1 to Aa2, following Moody's earlier
downgrade of Mainland China's rating from A1 to Aa3, reflecting
Moody's view that credit trends in Mainland China will continue
to have a significant impact on Hong Kong's credit profile.
1.3 Have there been interesting changes in the structure of
the banking sector in your jurisdiction?
While traditional banks remain the main providers of loan
financings, the investor base is becoming increasingly diverse,
particularly in the mezzanine/junior debt market where Chinese
private equity sponsors and hedge funds have become regular
On the regulatory side, the Hong Kong Monetary Authority
(HKMA) has been designated the 'resolution authority' for Hong
Kong's banking sector under the Financial Institutions
(Resolution) Ordinance (Firo), which came into force in July
2017. Firo provides for a special resolution regime for
systemically important financial institutions and gives the
HKMA power to take a range of resolution actions in the event
that an institution becomes non-viable.
SECTION 2: Financing structures
2.1 Briefly outline some recent notable transactions
involving your jurisdiction, highlighting any interesting
aspects in their structures and what they might mean for the
Stand-out examples from 2016/2017 include China National
Chemical Corp's $12.7 billion bridge loan for the acquisition
of Swiss agribusiness Syngenta AG and Tencent's $3.5 billion
term loan and revolver for the acquisition of mobile gaming
company Supercell Oy.
The Syngenta transaction was the largest ever foreign
acquisition by a Chinese company to date. The Tencent
transaction attracted oversubscription from a diverse group of
lenders, signalling increased market interest in lending to
support emerging market companies (for example in the tech
sector) which are perceived to be growth companies.
2.2 Have there been any significant developments in the way
cross-border financing transactions are structured or in the
way borrowers and/or lenders are participating in the
We have seen a number of banks add mezzanine debt tranches
to transactions where leverage for a senior portion exceeds 6x
(up from 4x, the average limit a year ago). This is consistent
with an observable increase in Hong Kong banks' willingness to
accommodate loans at higher leverage and bullet repayments with
In the bond markets, the Hong Kong-China Bond Connect
programme launched in July 2017, kicking off a new cross-border
regime giving international investors streamlined access to the
PRC's $9 trillion inter-bank bond market. Earlier in 2017, the
Hong Kong government issued the first 10-year sukuk (Islamic
bond) launched by an AAA-rated government, attracting $1.72
billion in orders. Long-term sukuk with a high credit rating is
unusual in the international markets and by extending the yield
curve to 10 years, Hong Kong set a new pricing benchmark for
sukuk bonds (3.132%, or 68 basis points over 10-year US
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that
govern cross-border financing in your jurisdiction.
An entity which carries on a banking or deposit-taking
business in Hong Kong must obtain a licence and become an
authorised institution under the Banking Ordinance. Authorised
institutions are regulated by the HKMA.
Any person other than an authorised institution that carries
on business as a money lender (or who holds himself out as
operating a lending business) must apply to a licensing court
for a licence. Several exemptions are available in relation to
this requirement, including loans to a company with a paid-up
share capital of HKD1 million ($128,000) or more.
3.2 Have there been any recent changes to regulations or
regulators that may impact the cross-border financing market
and what impact do you expect them to have?
See 1.3 regarding the implementation of Firo in Hong
In Mainland China, a new nationwide macro-prudential
management system for cross-border financings applies.
Introduced by the People's Bank of China in May 2016, the rules
introduce a new method for capping foreign debt incurred by PRC
entities which is based on an assessment of their net
value/capital and outstanding borrowings on a risk-weighted
basis, rather than by reference to an annual quota issued by
China's National Development and Reform Commission. The new
regime is generally viewed as a liberalising move, which we
expect will contribute to the increasing number of PRC entities
accessing debt offshore, particularly in Hong Kong.
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact lenders or borrowers involved
in cross-border financing in your jurisdiction?
The Hong Kong Financial Services and the Treasury Bureau is
preparing draft instructions for an amendment bill introducing
a statutory corporate rescue procedure and insolvent trading
provisions into Hong Kong law. The Bureau has indicated that it
will introduce the bill to the Legislative Council in late
2017/2018, though the timetable for implementation remains
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the financing market in your
Since its return to Chinese sovereignty in 1997, Hong Kong
has maintained its own independent legal system, protected
under the Hong Kong SAR Basic Law, based on English common law
and rules of equity. Participants unfamiliar with Hong Kong's
One Country, Two Systems constitutional framework are sometimes
surprised by the number of differences between Hong Kong and
PRC law and practice and the level of independence of Hong
Kong's judiciary. One example is in relation to the choice of
governing law. Under Hong Kong law, parties to a contract are
free to choose the law that governs that agreement (as long as
the choice of law is legal, unambiguous, bona-fide and not
contrary to public policy) and the Hong Kong courts will
generally give effect to and enforce such agreements. Facility
documents governed by New York or English law are therefore
commonplace in Hong Kong.
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in cross-border
financings in your jurisdiction?
We are frequently asked to advise on matters relating to the
granting and enforcement of security. Common questions include:
how security is taken over Hong Kong-incorporated/listed
entities (generally by mortgage or charge, though this depends
on the type of shares in question and whether they are publicly
listed); and whether Mainland Chinese entities can provide
security in respect of offshore financings made available to
offshore debtors (generally yes, subject to PRC
registration/reporting requirements and other restrictions on
maximum leverage and use and repatriation of proceeds).
4.3 Are there any classes of assets over which security
cannot be taken or regulations specific to your jurisdiction
governing the taking of security over certain classes of assets
that lenders should be aware of?
In general, security can be taken over any class of asset in
Hong Kong. There are a limited number of statutory restrictions
(for example in relation to assets of registered occupational
4.4 What measures should be taken to best prepare for your
Hong Kong is a mature and highly sophisticated financing
market. Participants familiar with UK/European practice should
not find the market particularly surprising, though it is still
important to obtain local advice, particularly where a
transaction involves a PRC nexus. It is also useful to have
some knowledge of market conditions and recent comparable
transactions in order to secure the best pricing terms (which
can vary by institution) and covenant package and to determine
the optimal financing structure. Most bank loan documents
negotiated in Hong Kong will be based on the standard forms
recommended by the Asia Pacific Loan Market Association and/or
the UK Loan Market Association, so familiarity with those
documents is also beneficial.
SECTION 5: Practical considerations
5.1 Briefly explain the downstream, upstream and
cross-stream guarantees available in your jurisdiction, with
reference to any specific restrictions or limitations.
A Hong Kong-incorporated company may give upstream,
downstream or cross-stream guarantees, provided that it is not
restricted by its articles of association from doing so. In
addition, it must demonstrate that it has requisite corporate
capacity to enter into and derives sufficient corporate benefit
from the transaction. For upstream guarantees and other
transactions where the benefit to the guarantor is less
obvious, it is prudent to obtain both board and shareholder
resolutions of the guarantor approving the transaction.
Under the Companies Ordinance, a prohibition on financial
assistance applies where a Hong Kong-incorporated company (or
its subsidiary) gives financial assistance for the acquisition
of its own shares (or those of its Hong Kong-incorporated
parent). Part 5 of the Ordinance provides for three principal
"whitewash" procedures which apply to both listed and unlisted
companies, including one where the giving of financial
assistance is approved by written resolution of all members of
the company and supported by a solvency statement and
resolution of its directors in favour of giving the
Additional restrictions may also apply to Hong Kong-listed
companies under the "connected transactions" provisions of the
Hong Kong Listing Rules.
5.2 Are there any specific issues creditors should be
mindful of regarding a bankruptcy and restructuring
There is no US Chapter 11-equivalent under Hong Kong law.
The main collective winding up process is regulated by the
Companies (Winding Up and Miscellaneous Provisions) Ordinance,
which applies to solvent, insolvent, members' and creditors'
voluntary winding up processes. While restructurings
implemented by way of scheme of arrangement under section 669
of the Companies Ordinance are common, creditors should be
aware that, in common with other jurisdictions such as the UK,
this procedure lacks a moratorium on creditor actions and so is
vulnerable to potential challenge from dissenting
Creditors should also note that a lender may not be able to
enforce security for a loan against a defaulting debtor if it
is found that the security constitutes a transaction at an
undervalue or an unfair preference under the C(WUMP)O. Certain
floating charges may also be invalidated under the C(WUMP)O,
except to the extent that valuable consideration has been
provided. Other restrictions on enforcement of security also
apply under the C(WUMP)O and other Hong Kong legislation,
including the Bankruptcy Ordinance.
5.3 Do foreign debt quotas apply in your jurisdiction and
is offshore financing to domestic entities monitored?
5.4 Describe your jurisdiction's relationship with
non-performing loans (NPLs), including volume of outstanding
NPLs and techniques/challenges in managing them.
Despite a slight increase in NPL volumes in 2015/2016, the
volume of loans overdue by three months or more end-March 2017
remained low at 0.66% of total gross loans according to HKMA
statistics. Volumes are not expected to increase significantly
in 2017, though a further slowdown in Chinese outbound activity
could have implications on Hong Kong banks' asset quality risk,
particularly given high average credit-to-GDP ratio and
corporate sector leverage on the Mainland.
Credit risk is tightly managed by Hong Kong's banking
institutions, who maintain stringent underwriting practices and
operate under the close supervision of the HKMA in relation to
both their Hong Kong and Mainland lending activities.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for
cross-border financing in your jurisdiction? How do you expect
legal practice to respond?
Consistent with developments over the last 12 months, we
expect further a steady growth in lending by Hong Kong's
financing sector to Chinese state-owned enterprises, corporates
and non-bank borrowers, which should lead to interesting
opportunities for the legal profession. In particular, as
Beijing's ambitious Belt and Road initiative gains momentum, we
predict increased opportunities in 2017/2018 for Hong Kong as a
hub for outbound Chinese financing activity in infrastructure
and other investments across the Belt and Road regions.
Practitioners who are able to provide creative and flexible
advice across the full spectrum of financing options are likely
to be in high demand, particularly in the infrastructure
investment space, where cutting-edge project finance expertise
will be of particular relevance.
Jamieson J Logie
Partner, Sullivan & Cromwell
Hong Kong, China
T: +852 2826 8688
F: +852 2522 2280
Jamie Logie is head of Sullivan & Cromwell's
Asia-Pacific projects and English law finance
practices, and has significant experience acting for
developers, borrowers and lenders in various
industries. Logie has more than 30 years of experience
in international legal practice, all focused on
project, asset and other finance and development work,
including acquisition finance and restructurings.
Logie's outstanding experience includes advising on the
recent TCO $16 billion project financing for the
expansion of its upstream operations at the Tengiz
supergiant oilfield in Kazakhstan; the 2016
restructuring of Kenmare Resources' project and
corporate financings for its Moma titanium project in
Mozambique; the refinancing of the Dolphin Energy
Project in Qatar/UAE; Australia Pacific LNG's $8.5
billion financing for its LNG facility in Queensland;
the BTC pipeline project financing in
Azerbaijan/Georgia/Turkey; a number of mining projects
in Africa and Asia; several of the first wave of
independent power projects (IPPs) in Southeast Asia;
and various cross-border corporate financings and
restructurings, including LG Philips' $2 billion
joint-venture financing in Asia.
Logie has been recognised by numerous legal outlets
and is described as "first rate, an excellent
all-around advisor" (IFLR1000, UK, 2017).
Jonathon G Hannah
Special counsel, Sullivan &
Hong Kong, China
T: +852 2826 8688
F: +852 2522 2280
Jonathon Hannah is special counsel at Sullivan &
Cromwell, practicing in the Hong Kong office. Hannah
covers the full breadth of finance work, including
project financing, restructuring, corporate lending and
acquisition finance. His experience includes financings
in the mining, energy, petrochemicals and telecoms
sectors in a wide variety of jurisdictions, including
Australasia, Africa, the CIS and the Middle East.
Hannah has represented developers, sponsors, banks and
ECA in relation to some of the most complex and
high-profile projects globally.
He is recommended in the 2016 and 2017 editions of
IFLR1000 and the 2014 edition of The Legal 500 UK for
his project finance expertise in the natural resources