December 10, 2014

On October 23rd, 2014, Baosteel Group Corporation (hereinafter the “Baosteel Group”) obtained approval from the China Security Regulatory Commission (the “CSRC”)  to issue exchangeable bonds to the public at a par value of no more than four billion RMB. This represents the first exchangeable bond issuance project in China that was approved by the CSRC since its 2008 promulgation of the Pilot Regulations for Listed Company Shareholders’ Issuance of Exchangeable Bonds. Watson & Band, as legal counsel for Baosteel Group, provided full legal services for the issuance of exchangeable bonds.

The term of the exchangeable bonds issued this time could be no longer than three years, and the funds raised thereby could be no more than four billion RMB. Holders of exchangeable bonds may, after twelve months have elapsed from the issue date, exchange their exchangeable bonds for a set ratio of Class A shares in New China Life Insurance Co., Ltd. (hereinafter “New China Insurance”) held by Baosteel Group.

Exchangeable bond, as an innovative financing tool, is a beneficial effort by Baosteel Group to explore new financing channels. Because of the involvement of convertible options, the bonds’ coupon rate may be lowered, a state of affairs that helps enrich the company’s financing channels, revitalize its stock assets and reduce financial costs.

Exchangeable bonds have no significant influence on the transaction value of the shares intended for exchange. First of all, when issuing exchangeable bonds, all shares used for the exchange are non-restricted tradable shares, and therefore the target share supply will not increase due to the issuance of new shares or the release of restricted shares in the listed company. Secondly, the twelve-month exchange delay lessens the direct impact that the issuance of exchangeable bonds might bring to the transaction value of the target shares. Thirdly, if the listed company intends to reduce its holdings of the target shares, gradual exchange of the shares by means of issuing exchangeable bonds will effectively relieve the pressure exerted by the reduction in shareholding, thereby avoiding direct short-term impact on the value of the target shares. Meanwhile, considering the cumulative effect of applicable law and overseas market practices, even if share exchange does take place in the future, it will be done at a premium. Consequently, to achieve low-cost financing, exchangeable bonds are significant in maintaining New China Insurance share value on the secondary market.

At the beginning of the project, Watson & Band conducted exploratory legal research into the entire transaction mode for exchangeable bonds. It defined the legal relationships between/among the issuer, the investor and the bond trustee. In addition to participating in routine activities such as the due diligence investigation of the issuer, the drafting of legal opinions and the review of the Prospectus, Watson & Band also conducted several rounds of review and revision of documents to be submitted to the CSRC including the Bond Trustee Agreement, the Bondholders Meeting Rules and the Guarantee and Trust Contract. During this process it offered cutting-edge legal advice on the nature of the Guarantee and Trust Contract to ensure its compliance with the CSRC’s bond issuance requirements.