What is Overseas Loan Under Domestic Guarantee and How to apply? | Article – HSBC VisionGo

“Overseas Loan Under Domestic Guarantee” is one of the more common channels in cross-border financing.
Finance  ·    ·  6 mins read

“Overseas Loan Under Domestic Guarantee” is one of the more common channels in cross-border financing. It is particularly popular in mainland enterprises’ “going out” process. For example, a Hong Kong subsidiary (or affiliate) may obtain financing with guarantee provided by its qualified mainland parent company in order to meet the company’s overseas operating capital needs. 

This article takes mainland enterprises (domestic) and Hong Kong enterprises (overseas) as an example, and explains how Overseas Loan Under Domestic Guarantee can be used in cross-border financing and how the application procedure can be completed more efficiently, focusing on four aspects: 

  • Explanation of the Overseas Loan Under Domestic Guarantee model 
  • General application process
  • Tips on making a more efficient application
  • FAQ

What is “Overseas Loan Under Domestic Guarantee”?

Overseas Loan Under Domestic Guarantee refers to the type of cross-border guarantee where the guarantor is registered in the mainland, while the debtor and creditor are registered overseas. In general, the guarantee is provided by a domestic bank to a domestic company for an overseas company (usually engaged in investment relationship), and the corresponding loan is released by an overseas bank to that overseas company

This guarantee method is commonly used where a domestic parent company provides guarantee for its overseas subsidiary (or affiliate) for its overseas financing activities. 

Simple Illustration of the concept of “Overseas Loan Under Domestic Guarantee” 

 

In practical terms, the concept illustrated above means: mainland parent “Company A” operates a Hong Kong subsidiary “Company B”. Company B needs capital for its day-to-day operations, for example for advance delivery, paying suppliers, or daily operations. However, because Company B has only been operating in Hong Kong for a short period of time, or Hong Kong banks have a certain requirement for Company B’s scale, it is therefore difficult for Company B to obtain any credit from a Hong Kong bank in the short run. 

In this situation, Company A can apply to a mainland bank for an Overseas Loan Under Domestic Guarantee. After Company A has submitted a security deposit, the mainland bank – as the guarantor – will issue a guarantee to a Hong Kong bank, which serves as a proof that it guarantees its responsibility to pay. The Hong Kong bank will release the loan to Company B on receipt of the bank guarantee, thus meeting Company B’s financing needs. 

Overseas Loan Under Domestic Guarantee: Application requirements and procedure 

In an Overseas Loan Under Domestic Guarantee arrangement, the guarantor can be a bank, a non-bank financial institution or an enterprise. This article focuses on the scenario where a mainland bank acts as the guarantor to provide guarantee to a Hong Kong bank against an overseas loan a mainland enterprise’s Hong Kong subsidiary (or affiliate) is taking out. The application procedures among different banks are similar. Taking HSBC as an example, the key criteria for application and the required documents are: 

Application criteria:

 

Requirement

Mainland company

  • With good credit status and sufficient counter-guarantee ability
  • Meets the basic requirements for financial guarantee applicants
  • Willing to provide to the bank unconditional and irrevocable counter-guarantee for its Hong Kong subsidiary (or affiliate)’s financing
  • Not a loss-making enterprise, etc.

Hong Kong subsidiary (or affiliate) 

  • Complies with mainland regulations on external guarantees by mainland institutions
  • Already registered in Hong Kong in accordance with the relevant law
  • Complies with mainland regulations on outbound investment 
  • Possesses sound organisational structure and financial management system
  • Possesses independent repaying ability (not including pledged bank deposits) etc.

Criteria that the business of the Hong Kong subsidiary (or affiliate) requiring financing should meet 

  • With genuine and legitimate background in project, trade or other financing
  • The loan is compliant with laws and regulation and policies applicable to the mainland enterprise and Hong Kong subsidiary (or affiliate)

Documents required:

 

Documents required

To be provided by the mainland company

  • Audited annual financial statements over the past three years and that of the most recent period
  • Status of existing external guarantee
  • Letter of intent for counter-guarantee
  • Relevant approval documents or proof of registration issued by the relevant mainland authorities concerning outbound investments, such as registered ODI for its overseas subsidiary (or affiliate)

To be provided by the Hong Kong subsidiary (or affiliate), which can be provided through the mainland company

  • Overseas registration documents and audited annual financial statement of the past year and that of the most recent period
  • The debtor’s Hong Kong business registration license or related proof
  • Proof of investment projects or trade background in Hong Kong, such as bidding documents, etc.
  • Loan and guarantee applications, etc.

Application procedure:

  1. The mainland company provides information to a bank in mainland to apply for financial guarantee. 
  2. The bank in mainland issues a financial guarantee to the mainland company when the guarantee application is approved.
  3. On receipt of the guarantee, the bank in Hong Kong releases the loan to the Hong Kong subsidiary (or affiliate).
  4. The bank in Mainland China submits data related to the Overseas Loan Under Domestic Guarantee to the State Administration of Foreign Exchange (SAFE) through the Administration’s data interface programme or other methods.

Tips on making a more efficient application

If the Hong Kong subsidiary (or affiliate) fails to repay the loan, the Hong Kong bank will initiate a claim against the mainland bank. The mainland bank will have to pay unconditionally, and creates capital outflow as the compensation is made in accordance with the contract. In order to avoid the abuse of Overseas Loan Under Domestic Guarantee, the SAFE is imposing more and more stringent assessment of the feasibility of performance of these loans. The bank will also be stringent in examining items such as the capacity as a debtor and the use of the funds under guarantee. Below are some tips on how to make a faster application. 

Capacity as a debtor

Before the guarantee application, the bank will examine whether the debtor (Hong Kong subsidiary or affiliate)’s capacity fulfils the relevant legal requirements in mainland and Hong Kong. The debtor is advised to have the following documentations ready for the bank’s verification:

  • Hong Kong: registration documentation of the debtor, company constitution, shareholding structure chart
  • Mainland: approval or filing record from the National Development and Reform Commission (NDRC), outbound investment certificate from the Ministry of Commerce, and foreign exchange registration certificate for Overseas Direct Investment issued by SAFE or a bank

Collaterals or funds of the counter-guarantor

If the counter-guarantor (mainland enterprise) uses cash collaterals such as deposit or security over deposits to provide counter-guarantee, they are required to state in the “cross-border guarantee customer confirmation” the source of the counter-guarantee funds. If the enterprise has successfully applied for Overseas Loan Under Domestic Guarantee through another bank, they may provide the supporting document for the mainland bank’s reference.

Use of the funds

The funds under the Overseas Loan Under Domestic Guarantee should only be used for relevant expenditures within the normal business scope of the debtor. It should not be used to support the debtor’s transactions beyond their normal business scope, and should not be used for arbitrage or any other speculative transactions by means of fabricated trading backgrounds.

Sources of funds for repayment and the possibility of the performance of the guarantee

The debtor should possess sufficient solvency or predictable sources of funds for repayment, maintain good operating conditions and avoid a debt ratio that is too high. The counter-guarantor and debtor should have a good credit history, and have not had incidents of debt default in bad faith.

FAQ

Q: Is it a must that the overseas debtor and the domestic counter-guarantor are engaged in an investment relationship?

A: Not necessarily. But if the overseas debtor involves a Chinese legal person in its shareholding background, prior registration of Outbound Direct Investment (ODI) with the SAFE is required.

What constitutes a shareholding background involving a Chinese legal person? 

For example, a business owner has a company in the mainland, as well as a company registered in Hong Kong: if that business owner invests in the Hong Kong company directly as an individual, then that is not regarded as a Chinese legal person background. However, if the Hong Kong company is set up as a result of the mainland company’s direct investment, it then possesses a Chinese legal person background.

Q: Apart from bank guarantee, a standby letter of credit can also be used as guarantee. What is a standby letter of credit?

A: A letter of credit is issued by a bank as a proof of guaranteed payment subject to conditions. In general, outward payment will be executed as long as the conditions are met. Nevertheless, in the case of an Overseas Loan Under Domestic Guarantee, the provision of a letter of credit is only a form of guarantee, while cross-border capital flow usually will not take place but is only put on standby – hence its name.

Q: What is the application process when the guarantor is a non-bank financial institution or enterprise? 

A: The counter-guarantor can apply to a non-bank financial institution or enterprise for guarantee. According to the “Operational Guidelines for Foreign Exchange Administration for Cross-border Guarantees”, the Overseas Loan Under Domestic Guarantee contract should be registered at a local Foreign Exchange Administration within 15 working days after the guarantee contract is signed.

When a non-bank institution registers an Overseas Loan Under Domestic Guarantee contract with the SAFE, it should provide the following: a written application for the registration of the Overseas Loan Under Domestic Guarantee contract, the guarantee contract and the principal debt contract under the guarantee, and the relevant supplementary documentation as required by the SAFE in accordance with the Provisions on Foreign Exchange Administration for Cross-border Guarantees.

Reminder: “To borrow or not to borrow? Borrow only if you can repay!”

The above information is for reference only.  The proposal/information mentioned in the above content is subject to the policy and regulation of local jurisdiction and government.  You should seek independent legal advice if needed.

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