Investors in credit enhanced bonds backed by standby letters of credit (L/Cs) may want to take the advice of a senior analyst at Moody's Investors Service who has recently expressed concerns about other types of credit enhanced bonds.

Vikas Halan was talking specifically about structures for offshore Chinese bonds and suggested that investors should carefully examine credit enhancements.

L/Cs and guarantees

Halan talked specifically about keepwell deeds, which are a contract between a parent company and its subsidiary to maintain solvency and financial backing throughout the term of a bond agreement.

These can be used as an alternative to standby L/Cs in credit enhanced bonds, as can guarantees.

Increasingly popular

All of these instruments are becoming popular amongst onshore Chinese companies looking to enhance the credit quality and therefore the ratings of offshore debt sold by their subsidiaries.

"It is critical to look beyond contractual arrangements to understand the business and economic motivations which a parent might have to support the subsidiary," says Halan about keepwell deeds.

L/C terms

Investors may also want to examine the terms associated with standby L/Cs in credit enhanced bonds, although these appear to be more strictly regulated than paper backed by keepwell deeds.

Chinese issuers have now sold more than US$9.4 billion of credit enhanced bonds graded by Moody's.

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