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PRC Pre-IPO Financings: What are the Exit Options?

March 2009
Baldwin Cheng

DOWNLOAD PDF: PRC Pre-IPO Financings: What are the Exit 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, such as (a) the low financing costs of borrowing US dollars offshore in comparison to borrowing onshore (and the appreciation of the RMB); (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 either the issuance of warrants or rights to acquire the shares at a pre-determined discount in the event that the borrower or an affiliate was listed on a stock exchange (usually on the Hong Kong or Singapore stock exchanges). However, given the current state of the equity markets, exit or loan repayment through IPOs seems unlikely in the near term and, at the same time, refinancing of these pre-IPO loans through the credit markets would also be a challenge given the ongoing credit crunch and a depressed property sector. As a result of these current market conditions, many of these pre-IPO financings are now under extreme stress.

This note explores the options available to offshore lenders when their investments are no longer performing and are in distress.

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