(a) Is it more usual for the financing needs of these types of corporates to be satisfied out of capital (equity) raisings; retained earnings; or external borrowings?

 

Most of the financing needs of these types of corporate are satisfied by capital raisings, retained earnings and external borrowings. According to the financial statistical report by the Directorate General of Budget, Accounting & Statistics, Executive Yuan dated 21 April 1998, the amount of funds raised from capital market (including equity, short-term bills, domestic and overseas corporate bonds, governmental bonds) in 1997 is 4,105 billion, and the amount of funds provided by financial institutions in 1997 is 12,545 billion, which is 22.4% and 68.4% of all the funds demand of the corporates.

(b) What are the main sources for borrowing for these types of corporates?

 

The main borrowing sources are financial institutions including banks, trust and investment companies and others. Public companies are allowed to issue corporate bonds to raise long-term funds from the public either in the domestic market or the overseas market. There is also an active money market in which companies may issue money market instruments to raise short-term funds. In addition, lots of companies borrow loans from the employees, shareholders or unlicensed lenders.

(c) Is there significant competition among lenders and significant choice of sources for borrowing available to these types of corporates?

 

Yes. There are 43 domestic banks, 44 foreign banks having branch office(s) in Taipei,China, 378 Credit Cooperative Associations and 5 Investment and Trust Companies operating the banking business in Taipei,China. As a result, it is quite competitive in the lending business market and thus there is also significant choice of sources for borrowings.

(d)What is the present average rate of interest payable in respect of unsecured and secured debt?

 

The interest of unsecured and secured borrowings is calculated at the rate of a spread over the prime rate (in case of N.T. dollars) or LIBOR or SIBOR (in case of foreign currencies). The spread is determined on a case-by-case basis.

The prime rate of domestic banks is between 7.025% to 10.07% (according to the financial statistical report by the Central Bank of China ("CBC") dated 30 June 1997).

(e) Is finance generally available for long, medium and short-term borrowings?

 

Yes.

(a) What part does the central bank of this economy play in the regulation of the banking and finance sector?

 

• The CBC is responsible for stabilizing financial market and supervising the operation of banks. The MOF delegates its auditing authority to the CBC to audit certain financial institutions for the MOF, while, the MOF is the agency having the power to sanction the financial institutions.

Would it intervene or seek to influence the outcome or course of events if, for example a large corporate with debt exposure to a number of banks was in financial difficulty?

 

• In the event that a large company with debt exposure to a number of banks is in financial difficulty, it is the MOF, rather than the CBC, which will try to intervene or seek to influence the outcome by, for example, coordinating all the banks involved to provide such corporate borrower with a grace period or to enter into a standstill arrangement with such company.

(b) Is there any tradition in this economy for a 'main' or 'house' or 'lead' bank to become involved as a chief negotiator or leader in the case of the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks?

 

To solve the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks, all of the banks involved will delegate their respective representatives to attend a work-out meeting to sort out the possible resolutions, and the resolutions so reached will generally be honored by each bank. In case no resolutions can be worked out, separate actions will be taken by each bank. In other words, there is no so called "main" or "house" or "lead" bank as a chief negotiator or leader in such work-out process.

(a) Is assessment or analysis of lending risk widely practised in this economy?

 

It is a prevailing practice in Taipei,China to assess or analyze the lending risk (i.e., the credibility of the borrower) for a financial institution's extension of credits to its customers. When a bank extends credits to its clients, it shall follow the Banking Law and the Guidelines for Extending Credits to Corporations promulgated by the MOF under the Banking Law, with respect to the credit risk analysis.

(b) If so, does the average lending bank make adequate assessment of risk analysis when contemplating lending to a corporate borrower?

 

Yes, generally speaking.

(c) Would it be usual or common for a lending bank to regularly monitor the financial performance of a corporate borrower?

 

Yes.

(d) Would it be usual or common for a lending bank to be regularly supplied with copies of the financial statements of a corporate borrower?

 

Yes.

(a) Is there a significant source of foreign bank lending in this economy?

 

Yes.

(b) If so, is it usual for this funding to be provided by the foreign bank/s alone or in combination with funding from local or domestic bank/s?

 

Both.

(c) Are you able to detect whether there are significant differences in approach and funding terms when a foreign bank is involved in the lending (as compared with a purely local or domestic funding)?

 

The most significant differences are that foreign banks conduct more stringent credit risk analysis and on the other hand, local banks more easily rely on the collateral provided by the borrower.

(d) If so, what are the main differences?

 

Please refer to (c) above.

(a) Is 'related' or 'exclusive' lending (ie where a corporate borrower and a bank have an established commercial relationship such that only that lender is looked to as the source of borrowing by the corporate borrower) common in this economy?

 

There is no such "related" or "exclusive" lending in Taipei,China.

Credits extended by a bank to any related person (as defined in the Banking Law) are limited by the Banking Law. According to Article 32 of the Banking Law, a bank shall not extend unsecured credits to an enterprise in which the bank owns more than 3% of its total issued and outstanding shares, nor to the bank's own responsible person, employee, principal shareholder, or the interested party (as defined in the Banking Law) of its own responsible person or credit officer, except in extending consumer's loans or loans to the government. In case of a secured credit, the bank is obliged to acquire a 100% collateral and the terms thereof must be not favorable than those of the other secured credits in the same variety.

According to Article 33-3 of the Banking Law and the CBC's regulatory letters, the limitations on credits to any person or any related person are as follows:

• the aggregate amount of all credits extended by a bank to any natural person shall not exceed 3% of its networth, among which the unsecured credit shall not exceed 1%;
• the aggregate amount of all credits extended by a bank to any juristic person shall not exceed 15% of its networth, among which the unsecured credits shall not exceed 5%;
• the credits to any government-operated enterprise by a bank will not be subject to the abovementioned limits; but the aggregate amount of all credits extended by to any government-operated enterprise shall not exceed the networth of the bank; and
• the aggregate amount of credits extended by a bank to all related persons shall not exceed 40% of its networth, among which
  • ² the aggregate amount of unsecured credits extended by a bank to all related persons shall not exceed 10% of its networth;
  • ² the aggregate amount of credits extended by a bank to all related persons who are natural persons shall not exceed 6% of its networth; and
  • ² the aggregate amount of unsecured credits extended by a bank to all related persons who are natural persons shall not exceed 2% of its networth.

(b) If no, what effect does this have if the corporate borrower is in financial difficulty or is insolvent?

 

The general debt recovery procedures will be carried out by banks, such as instituting court proceedings and foreclosure of collateral.

(a) Is 'syndicated' lending (ie where a group of banks or financial institutions join together to provide funding for a corporate borrower) common in this economy?

 

Yes.

(b) If so:

(i) does a lead bank perform the role of 'agent' on behalf of all the lenders; and/or

 

The lead bank of syndicated banks usually performs the role of an agent acting for and on behalf of all syndicated banks.

(ii) is the concept of a 'trustee' (or similar) for a syndicate of banks (ie where the 'trustee' holds any security for the syndicated funding on trust for the syndicate of banks) known and/or practised in this economy?

 

If the credit facility is a secured one, the lead bank will act as the security agent (similar to trustee) to hold the security for the syndicate.

(iii) if the corporate borrower is in financial difficulty or is insolvent what function does the 'agent' or 'trustee' perform?

 

The security agent will exercise the rights with respect to the security held by it for the syndicate.

(a) Is the concept known as 'debt subordination' (ie, a contractual arrangement between lenders in which there are 'layers' of 'senior' and 'junior' debt and which has the effect of postponing repayment of the 'junior' debt until payment has been made of the 'senior' debt) recognised and practised in this economy?

 

Subordinated debts have been recently practiced in Taipei,China. Some banks have issued subordinated notes to improve its BIS rate. However, such arrangement is effective only between the parties of such subordinated debt arrangement and the effectiveness of which is subject to court tests.

(b) If so, is debt subordination recognised and/or enforced under the insolvency regime of this economy?

 

There is no such case as to the recognition and enforcement of subordinated debt in Taipei,China. The position of the court regarding subordinated debts is unclear yet.

(a) Is it permissible for banks to own equity in a corporate borrower?

 

Unless permitted by the MOF on a special project basis, banks are not allowed to hold the equity of a corporate except that it may hold the equity shares acquired by it by way of the foreclosure of pledged shares. Such acquired shares must be disposed of within two years from the date of acquisition.

(b) If so, is it permissible for a bank to convert debt to equity?

 

With respect to a public company, its debts cannot be converted into equity. As to the private company, the bank needs to obtain the prior approval from the MOF (as referred to above) for the debt conversion.

(c) Are there instances where this has in fact occurred, particularly in the context of either:

(i) in the context of an 'informal work out' as a result of the insolvency or approaching insolvency of a corporate borrower; or

(ii) in the context of a formal insolvency administration of a corporate borrower?

 

Nil, according to our understanding, as far as public companies are concerned.

(d) In such a case, is it usual for the bank to be then represented on the management or board of the corporate borrower?

 

Not applicable to general manufacturing industries. The bank will take over the management of a financial institution in financial difficulties if so designated by the MOF.

(a) Is there a market for 'debt trading' (ie, where a bank might sell or trade the debt owed to it by a corporate borrower) in this economy?

 

Yes.

(b) If so, is debt trading common in this economy, particularly where the corporate borrower is insolvent or near insolvent?

 

The trading of "bad debts" is not common in Taipei,China.

(a) Is the concept of a third party 'guarantee' (as distinct from a security over property) to support corporate borrowing known and practised in this economy?

 

Yes.

(b) Is there a law which regulates the power to take or give a guarantee?

 

There is no restrictions provided by laws or regulations as to the power of an individual to give a guarantee.

According to the Company Law, a company cannot provide guarantees unless permitted by its articles of incorporation. Moreover, if the guarantor is a public company, the provision of guarantee by such a company shall follow its own internal guarantee policy which is required to be registered with the SFC.

(c) Is it common or usual for corporate borrowing to be supported by guarantee/s?

 

Yes.

(d) If so, are these guarantees usually taken from owners/directors of the corporate borrower; from other corporates associated with the corporate borrower (eg subsidiaries or holding company); or from unrelated third parties?

 

It is common in Taipei,China for the owners/directors or other associated corporates (usually the parent company) of the corporate borrower to provide guarantees.

(e) Is there a law which regulates the enforcement of guarantees?

 

The Civil Code has a chapter entitled "Guarantee" stipulating the conditions and effects of a guarantee. The Law of Compulsory Execution and the Code of Civil Procedure are applicable in case of the enforcement of guarantees.

(f) Is it easy or difficult in practice to enforce guarantee obligations?

 

Legally speaking, it is easy to enforce guarantee obligations. To enforce guarantee obligations against a guarantor, the creditor needs to institute a court proceeding against the guarantor (which provides no security) and obtain a final court judgment favorable to it. By way of enforcing such court judgment, the guarantee obligation can be satisfied through disposing of the property of the guarantor in court auction. Usually, it will take half year to a year to obtain a final court judgment, and it will take 4 to 6 weeks to complete a court auction.

(g) Is it usual to require that a guarantor should give security over the property of the guarantor as an additional comfort to the lender?

 

It is not usual to require the guarantor to further provide security over its property as an additional security for its guarantee obligations.

(h) Does the insolvency of a corporate borrower have any effect on the enforcement of a guarantee?

 

No.