Continuing problems at China Minsheng Investment Group (CMIG) are adding to concerns over the use of standby letters of credit (L/Cs) to back Chinese bonds.

In May it emerged that L/C backing for a CMIG bond may help contain a debt crisis at one of China's best known private equity houses, but appeared to justify long held concerns about the wisdom of lenders providing L/Cs for such bonds (DC World News, 8 May 2019).

L/C payout

In June, US$300 million of CMIG debt was repaid by China Construction Bank as the bank had provided a standby L/C to back some of the company's debt.

In July, CMIG announced it would be unable to repay a US$500 million bond due in August and its US dollar creditors would miss payment for the first time.

Liquidity crisis

The developments underline the liquidity crisis that has been pressuring the Shanghai-based company that aspired to be a global financial services giant.

The group says it is now looking to divest offshore assets to improve CMIG's current liquidity situation.

Declining L/C popularity

Standby L/C backed Chinese bond issuance peaked in 2014 at US$4.4 billion but has since become less popular, with only around US$1 billion of such bonds issued in 2019 so far.

Data compiled by Bloomberg indicates that there is around US$7.3 billion of outstanding Chinese standby L/C structured bonds.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.