China's Offshore Bonds, Asset Sale, and MFN Provision

Welcome to the fifth Pari Passu newsletter, 

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Today, we will learn more about: 

1. China's offshore bonds

2. Asset sale and its impact on leverage 

3. Most-favored-nation provision

What are China's Offshore Bonds?

Simply put, China offshore bonds are dollar-denominated bonds that are issued by a HoldCo that is usually established in the Cayman Islands or the British Virgin Islands. These HoldCos own nothing beyond shares (common equity) in operating companies that are domiciled in mainland China.

It's these OpCos that actually hold the assets of the company and engage in business activity. Therefore, the holders of the HoldCo bonds are structurally subordinate to any debt issued at the OpCo level. And, as you'd expect, OpCos do issue debt themselves. The debt they issue comes in the form of onshore bonds, secured loans, and all the other forms of unsecured claims any business will rack up as a consequence of their normal business operations (all of this onshore debt is RMB-denominated).

Note: The cash needed to repay the coupons due to HoldCo holders comes via dividends that OpCos issue that then flows through to the HoldCo. Alternatively, sometimes the relationship between the HoldCo and OpCo - by which the HoldCo passes on the proceeds from bond issuance and the OpCo passes back up proceeds for the coupon payments - comes via an intracompany loan as opposed to an equity investment by HoldCo into OpCo.

Remember that all else being equal, as a creditor you want to reside closer to where the assets are. But with offshore debt, you're about as separate from the actual assets of the OpCo as you can get because you're at a HoldCo domiciled in a different country with an inability to have true upstream guarantees as they're conventionally understood and practically applied.

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