Bankers are predicting an end to the use in China of standby letters of credit (L/Cs) provided by highly rated banks to back bond issuances in which the issuer has a much lower rating.

Chinese banks have been providing such credit-enhancement services to US dollar bonds, since July 2011 when Bank of China (BOC) backed Zijin Mining's US$480m bond issue.

Growing popularity

The largest standby L/C-backed offering so far is China Cosco's US$1 billion 10-year bond in November 2012, which helped the ailing shipper raise sufficient funds to tide it over a rough patch.

BOC supported five more issues in the past year, most related to embattled state-owned enterprises while in the past few weeks, ICBC and China Construction Bank each backed US dollar bonds with standby L/Cs.

Bankers sceptical

But some bankers are predicting an end to this market, which has also become popular in other jurisdictions, including India and Indonesia.

Chinese bankers in December were reported as saying regulators have ordered them to issue no more standby L/Cs for offshore bond issues.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.