Opinion: Aircraft and ship lease financing opens up

The China Banking Regulatory Commission (CBRC) issued the new Measures for the Administration of Lease Financing Companies (金融租赁公司管理办法) (Measures) on March 13 2014 and they took effect that same day. They replace the old measures issued by the CBRC in 2007 and open a new era for the development of lease financing companies (LFCs) in the PRC.

The pilot project for commercial banks to establish LFCs began in 2007. Up to the end of September 2013, there were 23 LFCs in the mainland, with aggregate assets of Rmb95.6 billion (US$15.3 billion) and aggregate net profits of Rmb1.18 billion (US$189.3 million), exhibiting an explosive average growth rate of 89% a year. The Measures were issued in this context with the aim of further liberalising the regulatory regime and facilitating the establishment and operation of LFCs.

The Measures reflect a more open and flexible regulatory attitude towards project-based special purpose vehicles (SPVs). The SPV structure is the key to vessel and aircraft leasing and financing arrangements. The Measures explicitly allow qualified LFCs to establish project companies within bonded areas of the mainland for the purpose of setting up financial leasing businesses. They also provide that LFCs can transfer or purchase financial leasing assets, sponsor asset securitisation schemes and provide guarantees to support fundraising by controlled subsidiaries and project companies. An LFC is therefore able to set up a SPV in a bonded area to act as the owner or lessor of the aircraft or vessel with the necessary credit enhancements as well as use the SPV as the platform to carry out asset-backed financing activities. In the long run, the SPV may transfer the lease receivables to a conduit specially designed or established for securitisation schemes.

Tianjin has long played a pioneering role in attracting the so-called “single vessel or aircraft SPVs”, but strong competition has emerged from the Shenzhen Qianhai Economic Zone and the Shanghai Pilot Free Trade Zone, both of which claim that the financial leasing business (especially aircraft and vessel financial leasing project companies or SPVs) is a priority. The expansion of free trade zones across the country will inevitably lead to fierce competition for LFCs or their SPVs.

The CBRC still needs to address two questions that have haunted LFCs for years. Firstly, the Measures indicate that “detailed conditions and procedures” in this regard shall “be implemented pursuant to the relevant rules”. The regulators must provide more clarity and elaboration in order for the goodwill of the Measures to be put into place. Secondly, while the Measures have a general principle of encouraging LFCs to set up branches and subsidiaries “according to business needs” subject to CBRC approval, it is still unclear whether and when LFCs are allowed to establish their branches and subsidiaries offshore. LFCs have always expressed the need to set up offshore SPVs in order to tap the international financial leasing market, but the current regime still lacks clear support.

While the new Measures mark a new era for aircraft and vessel financial leasing business undertaken by LFCs, the CBRC still needs to release detailed rules and guidelines. It is likely to take a more liberalised stance in catering to the genuine business needs of LFCs in the near future, providing the market with more opportunities and channels for financing.


Xin Zhang and Miller Wang, Global Law Office, Beijing


More from CLP:
Measures for the Administration of Lease Financing Companies
Interpretation on Issues Relevant to the Application of the Law in the Trial of Disputes over Lease Financing Contracts (Draft for Comments)