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Sole bookrunner and mandated lead arranger BNP Paribas closed a Rmb660mn pre-financing for Chinese metals producer Henan Yuguang Zinc last year, a breakthrough in closing transactions within China’s nascent legal environment.

The facility is structured as a domestic renminbi yuan (Rmb) pre-financing raised for borrower Henan Yuguang Zinc for the delivery of zinc ingots secured through a term sales contract with major international trader, Trafigura Group, as the offtaker.

The facility is credit enhanced through a guarantee of the parent company, Henan Yuguang Group, and a limited guarantee from the offtaker Trafigura Group.

It sets a number of precedents in terms of arranging financings in China. It is the first long-term Rmb denominated deal with a facility agreement based on Chinese laws, closed in the base metal industry in China.

With every aspect of the transaction governed by Chinese law, including loan documentation, purchase and sales contracts and the security package, the deal tested a legal system few foreign banks have yet got to grips with.

Other than the commercial reality in China in which Chinese law is adopted for all domestic transactions, BNP Paribas draws comfort from the fact that as a growing global economic superpower and with China’s dependence on the international market for critical raw materials and outlet for exports, there is no doubt that the interpretation of the Chinese law will be fair and continue to evolve in line with international practices.

The tenor of 4.5 years is also significantly longer than usually seen by commodity banks working in China. It also features the first long-term offtake contract by international trading house Trafigura Group in China.

Antoine Fagniez, managing director and co-head of energy and commodity structured debt, Asia-Pacific, at BNP Paribas, comments: “The main challenge was to convince participating banks of the robustness of the structure despite the nascent legal environment.”

Although some commodity banks struggled to obtain final approval to participate, the deal was generally well-received and oversubscribed, with a number of international banks joining on a club basis.

The appeal of the transaction suggests there is a growing international acceptance of Chinese law as the governing law for structured financing deals in China and cements the view that growth of the base metals industry in China will continue in a sustainably steady pace in the long term.

It is also notable that a regional domestic Chinese bank took part in the financing, suggesting Chinese banks are increasingly becoming important players in the structured commodity financing.

The deal also stands out as the proceeds of the pre-financing facility are being used to finance a brownfield expansion of a smelter, a first in China where usually a traditional project financing would be used.

In addition, the transaction has been arranged without the need for an offshore collection account mechanism.

Fagniez remarks: “This deal might influence the future of financing brownfield projects in China in two ways. It will create a real opportunity for Chinese smelters or steel mills to finance expansion of their producing capacity and will also offer additional opportunities for leading international trading companies to further develop their activities on the Chinese domestic market.”

Deal Information:

 

Borrower:

 

Henan Yuguang Zinc
Amount: Rmb660mn (US$89mn)
Mandated lead arranger: BNP Paribas
Additional lenders: Bank of Nanjing; Société Générale, SMBC
Tenor: 4.5 years
Offtaker: Trafigura
Date signed: August 2007