Letter of credit (L/C) backing for a bond may help contain a debt crisis at one of China's best known private equity houses, but it appears to justify long held concerns about lenders providing Chinese L/C backed bonds.

Not yet five years old, China Minsheng Investment Group (CMIG) has invested more than US$4 billion and amassed debts of US$34 billion and recently almost failed to make a bond repayment.

Deepening crisis

The crisis at Shanghai-based CMIG entered a new stage recently when the company announced that default clauses had been triggered on dollar bonds worth US$800 million.

The default comes after CMIG's existing liquidity problems spread to its affiliate, business park operator Yida China Holdings, making some of the developer's debt immediately payable, and causing a chain reaction back to the parent company's own securities.

L/C protection

According to Patrick Liu, chief executive officer of Hong Kong-based debt specialists Admiralty Harbour Capital, some of CMIG's outstanding dollar bonds are backed by L/Cs.

This is good news for investors who will be able to draw on those L/Cs should CMIG fail to make payments, but bad news for the L/C providers.

L/C concerns

China's central bank has longstanding concerns over lenders issuing standby L/Cs backing offshore bonds issued by mainland firms.

In 2014 the People's Bank of China told the mainland's Big Four banks to stop issuing L/C-backed offshore bonds issued by mainland companies.

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