Guidelines for the Establishment of Infrastructure Bond Investment Plan Products

(Issued by the China Insurance Regulatory Commission on, and effective as of, March 19 2009.)

Bao Jian Fa [2009] No.41

Part One: General provisions

Article 1: These Guidelines have been formulated pursuant to the Trial Measures for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Projects (the Measures), the Guidelines for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Bond Investment Plans (Trial Implementation) (the Administration Guidelines) and relevant regulations in order to steadily promote the indirect investment of insurance funds in infrastructure projects in the form of bonds, regulate the business for the establishment of bond investment plan products and protect the safety of insurance assets.

Article 2: Professional management firms, such as insurance asset management companies and trust companies that satisfy the provisions of the Measures and the Administration Guidelines (hereinafter collectively referred to as Professional Management Firms) may, as sponsors and managers and based on trust principles, sponsor and establish bond investment plans and raise funds to invest in infrastructure projects.

Article 3: When establishing bond investment plans, Professional Management Firms shall comply with the principles of fairness, impartiality, good faith and due diligence, and prudently launch the business in accordance with relevant laws and regulations and these Guidelines.

Part Two: Capacity criteria

Article 4: A Professional Management Firm that wishes to engage in the bond investment plan business shall, in addition to complying with the Measures and the Administration Guidelines, satisfy the following conditions:

(1) having established a professional management system and a dedicated subsidiary or division; the subsidiary must have a sound system of rules and regulations and corporate governance, an effective decision-making mechanism, compliant operational procedures, a clear liability pursuit and other such systems and having established a project reserve, investment review, investment management, credit rating, operational assurance, risk management, legal advice and other such functional departments; a division shall, at minimum, have the full-time positions equivalent to the departments of a subsidiary; and

(2) having a credit rating department or position, rating system, rating capabilities, etc. satisfying regulatory standards.

Article 5: A Professional Management Firm that wishes to engage in the bond investment plan business shall have professional personnel satisfying, at minimum, the following conditions:

(1) having not less than 20 persons with investment, credit, legal, accounting, auditing, asset appraisal, credit rating, risk management or other such work experience;

(2) having not less than eight persons with at least three years of project investment and/or credit management experience;

(3) having not less than four mid-level or higher level managers with at least five years of project investment and/or credit management experience and the relevant professional qualifications;

(4) having not less than three persons with at least five years of credit rating experience; and

(5) having not less than three persons for risk management of bond investment plans.

Article 6: A Professional Management Firm that wishes to engage in the bond investment plan business shall establish a scientific and sound system of rules and regulations that, at minimum, includes the following:

(1) a project reserve system that sets out the reserve entry standards, a code for the corporate governance of projects included in the reserve, financial indicators exceeding the industry's average level and relevant regulatory requirements, and that implements dynamic management of projects included in the reserve;

(2) a bivariate rating system that establishes a credit rating system and appraisal model appropriate to the firm's special characteristics, divides credit rating into entity rating and debt rating and specifies risk limits and issue size;

(3) a project evaluation system that establishes a project evaluation committee, with the number of external experts thereon numbering not less than one-third of the total number of members of the committee; the members of the evaluation committee shall maintain their independence;

(4) an investment decision-making system under which, in accordance with the decision-making authority and procedure of the authorised management provisions, examination and approval is ultimately to be carried out by the shareholders' general meeting, the board of directors or the investment decision committee authorised by it; the members of the investment decision committee who concurrently serve as members of the project evaluation committee shall not exceed 20% of the total number of members of the investment decision committee; and

(5) an investment accountability system that establishes a “dereliction of duty accountability, exemption of liability in the event of fulfilment of duties, and independent accountability” mechanism, with each person participating in a project bearing the attendant management liability within the scope of his/her duties.

Article 7: A Professional Management Firm that wishes to engage in the bond investment plan business shall establish an operating mechanism with mutual checks and balances that, at minimum, satisfies the following conditions:

(1) implementation of a strict separation of evaluation, decision-making, investment and monitoring;

(2) formulation of compliant operating procedures that, at the most basic, include procedures for the project reserve, due diligence investigations, credit rating, project appraisal, transaction structure design, decision examination and approval, arrangement for implementation and follow-up management; and

(3) clarification of job duties, with operation done strictly within the scope of authorisation and by the prescribed procedure.

Part Three: Establishment code

Article 8: A Professional Management Firm shall make the security of funds the precondition for the selection of the debt repayment entity. The term “debt repayment entity” means an entity with legal personality that pays the investment returns and repays the investment costs in accordance with the investment contract. The debt repayment entity may be the project owner, or the parent or de facto controller of the project owner. The debt repayment entity shall satisfy the following conditions:

(1) being a company that is listed on a main board in China or overseas, the de facto controller of a listed company or a large enterprise (group) under the central government;

(2) for two consecutive financial years indicators such as its asset to liability ratio, quick ratio, operating cash flow to liability ratio, core business profitability, net return on assets, interest coverage ratio and financial leverage multiplier being at the average level of domestically listed companies in the industry during the previous year;

(3) having an assessment report issued by a credit rating agency recognised by the regulator to the effect that it has a good credit status without any record of default, or being able to provide proof of punctual repayment of bank loans or payment of bond interest, and a credit entity rating satisfying the Professional Management Firm's internal rating standards;

(4) having the capacity to continue operating as a going concern, having a term of operations of at least three years, being profitable for the previous two consecutive years, having a stable cash flow and being able to cover project investment and debt servicing expenditures; and

(5) having a definite debt repayment plan, and a repayment source that is clear, specific, genuine and reliable such that it can ensure the repayment of the principal of, and returns on, the bond investment plan.

For the purposes of these Guidelines, the term “bank” means a policy bank, or a state-owned commercial bank or listed share-system commercial bank with a credit rating of at least AA during the previous year. If a state-owned commercial bank provides security in the form of an unconditional and irrevocable joint and several liability guarantee for the entire amount of the principal and interest, the debt repayment entity may be a large state-owned enterprise.

Article 9: A bond investment plan established by a Professional Management Firm shall correspond to a single investment project or a group of investment projects. An investment project shall, in addition to complying with the Measures, satisfy the following conditions:

(1) having been approved by the State Council or the relevant ministry or commission;

(2) complying with state industrial policy and development strategic plan, having a bearing on the national economy and people's livelihood, having a material economic value and social impact and being in an industry or sector whose development is encouraged;

(3) having a financial internal rate of return not lower than the anticipated rate of return from the bond investment plan and an interest coverage ratio of not less than four times;

(4) if it is a completed project, having a steady cash flow and a net inflow of cash from business activities larger than all interest and charges; if it is a project under construction or a newly constructed project, having a predictable cash flow and a definite interest payment and repayment fund arrangement for the construction period and after completion of construction;

(5) having good investment returns, and, after the deduction of fund costs, management costs, anticipated losses and other such relevant costs, reasonable earnings; and

(6) having an environmental assessment and energy saving evaluation meeting relevant state standards, and not being a highly polluting, high energy consumption, high risk and/or redundant project.

For the purposes of this Article, the term “group of investment projects” means projects approved by the State Council whose risks are controllable and that have relatively strong overall solvency. Projects approved by a provincial-level government shall have been completed, have good results and have strong solvency. If government fees are to be used for repayment, such government fees shall have a legal basis and corresponding constraints.

Article 10: When establishing a bond investment plan, a Professional Management Firm shall determine the credit enhancement. The credit enhancement method and the debt repayment entity's repayment source shall be mutually independent. Credit enhancement may be accomplished by any of the following methods:

(1) A-type enhancement method: a dedicated state fund, or an unconditional and irrevocable joint and several liability guarantee for the entire amount of the principal and interest provided by a bank; the provincial-level branch of a bank must provide a legal document from its head office authorising the provision of the security and give an account of the limit of the security provided by it and the amount of security already provided by it;

(2) B-type enhancement method: an unconditional and irrevocable joint and several liability guarantee for the entire amount of the principal and interest provided by a listed company with net assets of at least Rmb20 billion as at the end of the previous year or the de facto controller of the listed company, and satisfying the following conditions:

(a) the guarantor's credit rating not being lower than the debt repayment entity's credit rating;

(b) the entire amount of the security provided by the guarantor (including the aforementioned security) not accounting for more than 50% of its net assets;

(c) the guarantor's quick ratio not being less than the average level of domestically-listed companies in the industry during the previous year;

(d) the guarantor and debt repayment entity not acting as guarantor for each other; if the parent of the debt repayment entity is providing security, the parent's net assets not being less than 1.5 times the net assets of the debt repayment entity; and

(e) the security contract entering into effect only after the guarantor has completed all lawful procedures; if the guarantor is a listed company, it shall provide a board resolution signed by a quorum of the directors;

(3) C-type enhancement method: security provided in the form of a pledge of listed company tradable shares that are relatively highly liquid, the fair value of which is not less than four-times the value of the debt, that are fully disposable and on which there are no sales restrictions, or security provided in the form of a pledge of fee charging rights that are transferrable in accordance with the law, or security provided in the form of a mortgage of physical assets that may be disposed of in accordance with the law, are not encumbered by third party rights, have the potential to increase in value and are easy to realise. Pledge registration must be carried out for security provided in the form of a pledge. Mortgaged property registration must be carried out for security provided in the form of physical assets, and the mortgage must rank first in the sequence of mortgages. Listed company tradable shares with no restriction on sale shall satisfy the provisions of the Tentative Measures for the Administration of Stock Investments by Insurance Institutional Investors and other such rules concerning the types of stock in which insurance institutional investors may invest. The fair value of physical assets shall be determined by an appraisal firm with the highest professional qualifications, and a reappraisal thereof shall be carried out at least once per year. Where security is provided in the form of a mortgage of physical assets, strict control shall be practised, the same shall be used with care and realisation risks shall be guarded against.

Article 11: When a Professional Management Firm is to establish a bond investment plan, it shall fully take into consideration economic cycles and interest rate cycles, rationally determine the bond investment plan's issue limit, term and investment returns and guard against systemic risks. A bond investment plan's issue limit and term shall comply with the following provisions:

(1) the balance of investments in a single debt repayment entity shall, in general, not exceed Rmb3 billion, and shall not exceed 40% of the total investment in a single project;

(2) the balance of investments in an uncompleted project shall not exceed the amount of loans actually disbursed by banks; and the balance of investments in completed projects shall not, during the life of the bond investment plan, exceed four-times the balance of bank loans; and

(3) if A-type credit enhancement is used, the maximum term of the bond investment plan shall be 10 years, if B-type credit enhancement is used, the maximum term of the bond investment plan shall be seven years and if C-type credit enhancement is used, the maximum term of the bond investment plan shall be five years and may not exceed the term of validity of the pledge or mortgage.

For the purposes of this Article, the term “balance of investments” means the combined balance of the insurance industry.

Article 12: A Professional Management Firm shall design a clear, specific and effective transaction structure, paying special attention to the following:

(1) the mechanism for the checks and balances among the concerned parties and the internal firewall system;

(2) the principal risks, triggering events and control measures;

(3) the withdrawal mechanism, fund repayment means and the responsibilities of all relevant parties; and

(4) that the subordinate projects under a group of projects shall belong to the same debt repayment entity and project owner, and that the subject matters of the investments are of the same nature and have a natural connection. Separate financial accounts must be opened for each subordinate project and the corresponding assets therefor must be determined. The projects may not mutually appropriate each other's funds.

Intermediary service firms shall render clear opinions and conclusions on the lawfulness and compliance of a bond investment plan established by a Professional Management Firm, issue the relevant supporting documents and ensure that the information that they provide is timely, true, accurate and complete.

Article 13: When establishing a bond investment plan, a Professional Management Firm shall charge a product management fee based on fair market principles and by comprehensively taking into account requirements such as operating costs and duties to be performed. The management fee rate for a bond investment plan of less than Rmb2 billion shall provisionally not be lower than 0.4% per year and for one of at least Rmb2 billion shall provisionally not be lower than 0.3% per year. The specific fee rate shall be decided by the parties through consultations. A Professional Management Firm may not use bond investment plan assets for the giving of benefits and may not use means such as lowering fee rates, discounting or disguised discounting to eliminate market competitors and engage in malicious competition.

Article 14: When a Professional Management Firm establishes a bond investment plan, the size of its business must be consistent with its business capital. For each bond investment plan that it establishes, it shall allocate a certain percentage of its annual management fee income to a risk reserve, the percentage of which shall provisionally not be less than 10% of the management fee income, which shall mainly be used to cover losses caused to bond investment plan assets or to the beneficiaries of the bond investment plans due to violations of laws or regulations, breach of the trust contract, operational errors, dereliction of management duties, etc. by the Professional Management Firm. If the risk reserve is insufficient to cover the aforementioned losses, the Professional Management Firm shall use its own property to make compensation. Once the balance of the risk reserve reaches a certain percentage of the net value of the bond investment plan assets, no further allocations need be made thereto.

Article 15: When a Professional Management Firm establishes a bond investment plan, it shall report the same to the China Insurance Regulatory Commission for the record. The materials submitted for the record must comply with the Measures, the Administration Guidelines and these Guidelines and satisfy the relevant criteria.

Article 16: After record filing with the China Insurance Regulatory Commission, the Professional Management Firm shall issue its bond investment plan based on market principles, promote its product to non-affiliated third party institutions by way of a roadshow, duly perform its information disclosure obligations and clearly disclose the various risks. If the bond investment plan is for a group of projects, relevant information on the subordinate projects shall be disclosed. If an affiliated transaction is involved, the connected transaction parties, pricing principles, subject of the transaction, transaction method and transaction amount shall be disclosed. The scale of the proceeds raised from insurance companies within the group or from affiliates may not, in general, exceed more than 60% of the issuance.

Article 17: A Professional Management Firm shall arrange for certificates of returns on bond investment plans, register the same with, place the same in the custody of and have the change in the ownership of the same carried out by a designated professional firm and promote the continued trading of the certificates of returns on bond investment plans. Rules on registration, custody, transaction settlement, trading, transfer, pledging for financing purposes, etc. will be formulated separately by the China Insurance Regulatory Commission.

Part Four: Risk control

Article 18: When engaging in the bond investment plan business, a Professional Management Firm shall establish an effective risk control system that, at minimum, shall include key stages such as project development, credit rating, project evaluation and risk monitoring:

(1) project development: the project manager shall assume duties such as project approval, due diligence investigation, design of the transaction structure, commercial negotiations, auxiliary decision-making, follow-up management and recovery of funds;

(2) credit rating: credit rating personnel shall conduct onsite and offsite investigations, obtain comprehensive, true and objective information, adopt a combination of qualitative and quantitative analysis methods, put forth project investment opinions, evaluate on an ongoing basis the repayment capacity of the debt repayment entity, the security provision capacity and effectiveness of the guarantor, the lawfulness, effectiveness, practicality and change in the fair value of the pledged thing or the mortgaged physical asset, corroborate the appraisal conclusion of the external appraisal institution and assess changes in the degree of risk and credit quality; in the event of an adverse change in the fair value of the pledged thing or mortgaged physical asset, or a failure to satisfy conditions for the continued use of funds, measures shall promptly be taken to supplement the pledged thing or physical asset in a timely manner;

(3) project evaluation: the project evaluation and preliminary review personnel shall conduct an evaluation and preliminary review of a project's lawfulness and compliance, credit enhancement arrangement, economic benefits, securing of ancillary funds and source of repayment funds, etc. by comprehensively taking into account the application for project approval and investment proposal submitted by the project manager, the intermediary firms' evaluation conclusions and the credit rating personnel's rating conclusions, fully disclose the project risks, render an appraisal and preliminary review conclusion and submit a definite evaluation opinion to the project evaluation committee;

(4) risk monitoring: the risk management department shall designate a person responsible for management of the project risks, monitor the operation of the bond investment plan throughout, strengthen investment follow-up risk management and forewarning, track that the work at each stage, such as inspection and monitoring is duly done, evaluate the performance of duties of relevant responsible persons, give risk alerts in a timely manner and put forward suggestions for rectification. The chief risk management officer shall regularly submit risk appraisal reports.

Article 19: The board of directors of a Professional Management Firm shall bear ultimate responsibility for risk control, be responsible for planning for the business for the establishment of bond investment plans, approve and monitor the implementation plan for the business for the establishment of bond investment plans and establish a regular review and assessment mechanism. The chairman of the board, general manager or authorised representative of the Professional Management Firm shall sign the risk awareness letter, product risk statement and follow-up management statement of a bond investment plan.

Part Five: Inspection and reporting

Article 20: In addition to reporting to the China Insurance Regulatory Commission on the establishment and operation of its bond investment plans in accordance with the requirements of Article 71 of the Measures and Part Six of the Administration Guidelines, a Professional Management Firm shall report on the following at least once each year:

(1) the details of the operation of its subsidiary or division;

(2) the details of the operation of its credit assessment department; and

(3) the performance of duties of management personnel at each level.

In the event of a contingency, it shall report on the management of the response to the China Insurance Regulatory Commission within five working days.

Article 21: The China Insurance Regulatory Commission shall oversee the business for the establishment of bond investment plans of Professional Management Firms in accordance with these Guidelines. If the materials submitted for the record by a Professional Management Firm contain false records, misleading statements or material omissions, the China Insurance Regulatory Commission will impose in accordance with the law administrative penalties on the organisation and personnel who committed the infraction, and prohibit insurance companies from investing in the investment plans established by the Professional Management Firm.

Part Six: Supplementary provisions

Article 22: A Professional Management Firm may engage in relevant business only if it satisfies the relevant provisions of Part Two hereof.

Article 23: With respect to major projects approved by the State Council, their debt repayment entities, project qualifications, investment limits and terms may be adjusted appropriately.

Article 24: The bond investment plans mentioned in these Guidelines are limited solely to ordinary bond investment plans. The rules for the establishment of bond investment plans with embedded conversion rights, etc. will be formulated separately by the China Insurance Regulatory Commission.

Article 25: The China Insurance Regulatory Commission is in charge of interpreting these Guidelines. The China Insurance Regulatory Commission may, based on actual circumstances, amend relevant provisions.

Article 26: These Guidelines shall be effective as of the date of issuance.

Appendix: Formulae for calculating relevant financial indicators

1. Asset to liability ratio = total liabilities/total assets

2. Quick ratio = (current assets – inventory)/current liabilities

3. Operating cash flow to liability ratio = net operating cash flow/total liabilities

4. Core business profitability = profit from core business/revenue from core business

5. Net return on assets = 2 × net profit/(net assets at beginning of period /net assets at period end)

6. Interest coverage ratio = (net profit + interest expenditures + income tax)/interest expenditures

7. Financial leverage multiplier = total liabilities/net assets

8. Financial internal rate of return = aggregate of current values of the cash flows for each year during the project calculation period being equivalent to the zero hour discount rate