Covering the bases in financing via corporate debt instruments

In order to guard against risks, the central government requires local governments to control and oversee the scale of issued debt, but relevant information shows that the issuance of debt by local governments and enterprises has not been markedly affected by this. For qualified enterprises, financing through the issuance of debt remains the low-cost fundraising method of first choice. The types of enterprise financing available include super and short-term commercial paper, small and medium enterprise collective notes, short-term financing bills, medium-term notes, directional instruments, asset-backed notes, project revenue notes as well as financial bonds issued by financial institutions. This column will mainly discuss corporate bond financing and related issues that require particular attention in terms of law, such as information disclosure.

Innovation in financing methods

The project revenue notes introduced by the National Association of Financial Market Institutional Investors have created the conditions for the financing of single projects. The term “project revenue note” means a debt financing instrument offered on the interbank bond market by non-financial enterprises, the proceeds of which are used for project construction and the operational cash flow derived from the project serving as the main source of funds to repay the debt.

As compared to traditional debt financing instruments, the mechanism design of project revenue notes adopts several innovations. The product design, based on the project itself, creates a good financing environment for the financing of the project company. The product offer period covers the entire life of the project from construction to operation and reaping of the benefits, fully considers the matching with the project cash flow recovery schedule, thereby smoothing out, with the aid of the financial market, the mismatch between the revenue and expenditure periods of urban construction projects and allowing the enterprise to formulate a reasonable repayment plan based on the project schedule.

Li Yunhai is a partner at Zhonglun W&D Law Firm