On 31 May 2021, The Stock Exchange of Hong Kong Limited (HKEx) published its fourth issue of Listed Issuer Regulation Newsletter, which includes, among other matters, an update on listed issuers meeting financial reporting obligations amid the Covid-19 pandemic, guidance on lending transactions, confirmation on material loan arrangements of counterparties with connected persons when vetting notifiable transactions, and highlights of listed issuers’ spin-off activities.
This newsletter focuses on HKEx’s guidance on lending transactions.
HKEx identified four cases of particular concern:
- Company A granted loans to nine business partners. Company A neither performed any credit risk assessments on the borrowers nor obtained any collateral. Ultimately, the borrowers defaulted.
- Company B lent money to six independent parties. The loans were granted mostly interest-free or at a rate substantially lower than Company B’s cost of capital, raising questions over the commercial merits of such lending. Ultimately, 70% of these loans were unrecoverable shortly after they were made.
- Company C granted unsecured loans to 18 individual borrowers without adequate due diligence or collateral. Over 90% of these loans were unrecoverable in the following year.
- Company D entered into a cross-guarantee arrangement with a third party to guarantee each other’s banking facilities. The size of the guarantee provided by Company D was substantially larger than that provided by the third party. No financial due diligence was conducted on the third party. Subsequently, the third-party defaulted on its bank loans.
The HKEx is concerned that some listed issuers failed to release their results after their auditors identified issues relating to their lending transactions, such as a lack of business rationale or commercial substance, excessive lending in size compared to the scale of the company’s business operations, or defaults in repayment shortly after the grant of loans.
The HKEx considers the problems suggested a lack of proper internal controls, management expertise, or oversight of the listed issuers. The HKEx further raised questions about whether directors of these listed issuers had properly discharged their fiduciary duties.
The HKEx emphasized that material lending transactions will remain a focus area in HKEx’s review for the current year of listed issuers’ annual reports and on-going disclosure.
Contact us today for assistance with listed companies disclosures, regulatory issues under the SFO and the Listing Rules relating to lending transactions or help with due diligence.