* Bond addresses lack of recourse to assets * Effective guarantee attracts investors * Rating agencies still suspicious By Nethelie Wong Nov 16 (IFR) - Shanghai-listed Gemdale Corp made its debut in the US-dollar bond market this week, showing that Chinese companies are getting more creative in their quest for foreign capital. Gemdale's US$350m five-year bond, rated Ba3/BB (Moody's/S&P), introduced an innovative structure to the US-dollar market, using a complex series of inter-company agreements, instead of a more conventional guarantee, to lure investors. The format neatly navigates China's many capital account and foreign exchange restrictions, and suited an issuer with few overseas assets. "It is an innovative solution, enabling PRC companies to achieve a bond rating and tap offshore markets without providing a guarantee and, potentially, use the proceeds for onshore purposes," said William Liu, a partner at Linklaters. Gemdale also becomes the first privately owned Chinese company without an overseas listing to sell US-dollar bonds this year, attracting overseas fund managers, despite operating under unfamiliar legal and accounting regimes. The same structure had allowed Gemdale to win a credit rating for its offshore renminbi bonds in July. This time around, the format helped the company to price on a day when other prospective issuers were forced to shelve their plans. In doing away with the need to guarantee the bonds, Gemdale could set a template for other A-share-listed companies looking to access the international debt markets. Onshore property developers, in particular, face numerous restrictions on domestic funding and are barred from providing guarantees to offshore entities. Many have been forced to take the so-called "red-chip" approach of incorporating and listing overseas to raise money. China SCE Property, Soho China, Yuzhou Properties and Longfor Properties have all sold US-dollar bonds in the past month. All are listed in Hong Kong. Gemdale's structure could also allow overseas listed companies to raise additional funding, with Guangzhou R&F already linked to a similar deal. EFFECTIVE GUARANTEE The structure Gemdale used on its Dim Sum bond and on its 7.125% notes creates an effective guarantee from the parent if the issuing entity faces financial difficulties. The bond features a "keep well agreement" and a "letter of undertaking" between the onshore parent and the offshore guarantor. The issuer is Gemdale International, a fully owned special-purpose vehicle of Famous Commercial, which is, in turn, an offshore subsidiary of onshore-incorporated Gemdale Corp. While investors still do not have recourse to the onshore assets, a deed of equity interest purchase requires the onshore parent company to buy the assets of Famous if it runs out of money. The purchase price must be enough to cover the unit's liabilities, including the new bonds. Investors will neither have recourse to the onshore assets nor a guarantee, but they will have a commitment from the parent to meet the liabilities associated with the bond. There is also an interest reserve account for 12 months. On top of that, leads HSBC and JP Morgan have included a keep well agreement, where Gemdale Corp commits to maintain positive net worth and sufficient liquidity at Famous. GREATER FLEXIBILITY Such a fancy structure is necessary since China's capital account controls do not allow onshore parent companies to guarantee offshore financing without State Administration of Foreign Exchange approval, while offshore subsidiaries cannot remit the proceeds onshore. Typically, a Chinese company requires approval from the National Development Reform Commission to inject new capital or lend money to an overseas subsidiary. However, Gemdale's letter of undertaking requires only an intra-group equity purchase, since both the buyer and the assets are onshore. That means only local approvals from the Ministry of Commerce and SAFE are needed - both of which are more routine in nature. For Gemdale, the US-dollar deal stemmed partly from the encouraging response to its Rmb1.2bn (US$190m) three-year 9.15% Dim Sum bond in July, which drew Rmb4.7bn of orders from 111 accounts. (Reporting By Nethelie Wong; Editing by Steve Garton and Christopher Langner)

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