Datang Financial Leasing joined forces with their bank to action a novel US$100m financing solution that helped the company sidestep regulatory credit limitations. The solution involved cross-currency accounts receivable financing backed by a receivables pledge and corporate guarantee, coupled with FX swap and interest rate swap.

Novel financing solution helps Datang Financial Leasing overcome credit limitations

The challenge

Datang Financial Leasing, the financing platform for power producer China Datang Corporation, entered into multiple sale-and-leaseback contracts with intra-group lessees. The leased assets included power generation equipment, which is leased back to the lessees with usage rights.

Datang Financial Leasing required Deutsche Bank to finance these receivables from the lessees but did not want to utilise its onshore credit limits with Deutsche Bank China, due to the regulatory cap on single counterparty lending limits (maximum SCLL exposure is CNY871m and maximum SGLL exposure is CNY1,742m). The company also faced increasing cost pressures due to mounting interest rates in China.

Datang Financial Leasing was therefore looking to secure a large amount of financing in one single transaction, despite the bank’s single counterparty lending limit. It also wanted to access the relatively competitively priced USD interest-rate environment in Hong Kong, in comparison to rising CNY interest rates environment onshore.

The solution

The bank structured a US$100m cross-border, cross-currency, with-recourse receivables financing solution to Datang Leasing. The solution sees Deutsche Bank Hong Kong finance Datang Leasing’s receivables from onshore sale-and-leaseback contracts.

Datang Leasing then converts the US dollar (USD) funds into Chinese yuan (CNY) for its working capital requirements. The solution also uses interest rate swaps and a forward to hedge the Datang Leasing’s currency and interest rate risks incurred by interest payments and principal repayments.

The facility is secured by receivables due from lessees through pledge of lease receivables and an irrevocable corporate guarantee from China Datang Capital Holdings.

Best practice and innovation

Despite the challenges, Datang Leasing succeeded in implementing a meticulously structured solution that achieved all of its objectives and demonstrated best practice in the following areas:

Strong regulatory and legal expertise: due to the cross-border and cross-currency nature of this transaction, external legal counsel was engaged to conduct thorough due diligence. This helped the bank successfully navigate China’s complex regulatory policies on foreign debt quotes and cross-border securities requirements. These include rules governing the filing of foreign debt quotes with State Administration of Foreign Exchange (SAFE) before funding; and registration of accounts receivable pledging with the PBoC’s Credit Reference Centre, which ensures a legally watertight assignment of securities from the seller to the buyer.

Innovative trade structuring capabilities: considering the regulatory and legal requirements, the transaction is carefully structured with multiple recourse and numerous risk-mitigating structures, such as corporate guarantees, pledges of receivables perfected and registered in accordance with relevant governing laws and over-collateralisation.

Multi-branch collaboration: successful implementation of the solution also required smooth co-ordination between the trade finance and global markets teams over multiple interfaces, including pricing and operational workflow. The result was a successful transaction, bringing sound return, strong cross-sell and multiple replication opportunities.

Key benefits

• A one-stop-shop solution that delivered a large financing amount in one transaction and ensured currency and interest-rate risks were hedged.
• An alternative to tapping into the relatively limited onshore cap on single counterparty lending limit – instead tapping into the foreign debt quota.
• A diversification of funding sources, accessing Hong Kong’s offshore USD interest-rate environment.
• A comprehensive solution that can be replicated across other leasing receivables – something Datang Leasing is already planning.
• The bank provided US$100m worth of financing in a single transaction.
• Financing cost savings from accessing the relatively competitively priced USD interest- rate environment in Hong Kong, compared to the rising CNY interest-rate environment onshore.