Making the connect

The multi-faceted structure was one of the first of its kind in the capital and finance markets. The three facets, comprising a rights issue, banking financing and tender offers, were inter-conditionally structured, the rationale for which was primarily driven by the commercial objectives of Renhe and the lending banks.

The ultimate purpose of the transactions was for Renhe to buy back its outstanding senior notes, due in May 2015 and March 2016, through a cash tender offer. Given the amount required for financing the tender offer, it was considered to be most feasible at the time to adopt a mix of equity and debt funding, taking into account the interests of Renhe’s shareholders. The tender offer was intended to be financed by the utilisation of proceeds raised from the rights issue – on a two for one basis with discount – and a combination of syndicated and bilateral loans, and so structurally, the tender offer was conditional upon: (a) the rights issue becoming unconditional under the underwriting agreement and the same being not terminated shortly after the expiration of the tender offer; and (b) drawdown of the bank financings.

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For the debt financing, the special-purpose bank loans were structured to be conditional upon the tender offer becoming unconditional, and as the institutional financiers were keen on Renhe having alternative means of financing other than the committed bank financings, drawdown was also conditional upon the rights issue becoming unconditional. The rights issue was conditional upon the tender offer as the primary purpose of the rights issue was to finance the tender offer. The Hong Kong Stock Exchange (HKEx) wanted certainty of the rights issue, in particular upon the commencement of the trading of nil-paid rights, to safeguard the interests of investors and shareholders who had traded in anticipation of the rights issue.

The rights issue was therefore structured to be conditional only upon selected conditions of the tender offer being satisfied or waived by Renhe, where applicable, and the rights issue was launched, with the prospectus, provisional allotment letters and excess application forms (or the “rights issue documents”) despatched to qualifying shareholders after such conditions of the tender offer were satisfied (or waived) accordingly. This inter-conditional and complex structure of the transactions can be said to be skilfully crafted not only to achieve Renhe’s objectives but also to give effect to the financiers’ and the regulator’s demands, and at the same time protect the interests of shareholders and investors.

Precedent case for rights issue

Renhe was one of the initial 268 selected HKEx issuers with securities eligible for southbound trading through the Shanghai-Hong Kong Stock Connect. Renhe’s rights issue was the first rights issue conducted by an eligible HKEx issuer since the commencement of Stock Connect on 17 November 2014, and has set a market precedent for future rights issues of other HKEx issuers under the Stock Connect. Previous rights issues have often not been extended to investors in the PRC due to regulatory concerns. The timely launch of the Stock Connect offered an unprecedented opportunity for investors in the PRC to participate in Renhe’s rights issue. The PRC investors could, under the Stock Connect regime, participate through China Securities Depository and Clearing Corporation (or China Clear), which was there to provide nominee services to the PRC investors in Stock Connect to either subscribe for their pro-rata entitlement or sell the nil-paid rights on the stock exchange. The services on application for excess rights shares, purchase of nil-paid rights and the transfer of nil-paid rights to other PRC investors in Stock Connect have, however, not been supported by China Clear.

Stock Connect has been a significant breakthrough in liberalising China’s capital markets and developing a “mutual market”, as some have called it, whereby investors in both China and Hong Kong can trade shares in the other capital market. Renhe’s rights issue, being the first in this “mutual market”, has seen the collaboration of the regulators, the HKEx and China Securities and Regulatory Commission (CSRC), in setting up the regulatory framework and procedures for the purpose of Renhe’s rights issue.

In addition to the registration(s) of the rights issue documents in Hong Kong and the place of incorporation of the listed issuer (where applicable), an HKEx issuer whose securities are eligible for southbound trading in stock exchange is also required to file the rights issue documents with the CSRC. The Notice of the CSRC – Filing Requirements for Hong Kong Listed Issuers Making Rights Issue to Mainland Shareholders through Shanghai-Hong Kong Stock Connect (Announcement 2014 No. 48) sets out the requirements for filing of the rights issue documents and other requisite documents with the CSRC after approval from the HKEx has been obtained.

In practice, the filing requirements would mean that after the registration of the rights issue documents in Hong Kong and the issue of the listing approval for the rights shares by the HKEx, the listed issuer is required to file with the CSRC requisite documents primarily comprising the rights issue documents, documents submitted to the HKEx, letters of approval and prospectus registration from the HKEx, and a letter of undertaking to the CSRC. Upon completion of the filing procedures, the CSRC will issue an acknowledgement of the filing, which will be sent to China Clear. The entire process has to be completed prior to commencement of trading of the nil-paid rights.

Renhe’s trilogy transactions attracted a great deal of attention, not only due to the innovative structure, but more because of the unprecedented example set in the context of a rights issue in Stock Connect. The joint regulatory efforts enabled Renhe to achieve its goals and complete the deal.

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Psyche Tai is a partner and Rachel Chan is a senior associate at Norton Rose Fulbright. Both lawyers participated in this deal.