Moody's Investors Service has downgraded the ratings on two stand-by letter of credit (L/C) enhanced bonds.

The ratings downgrade is due to the ratings agency's concerns over the L/C providers, the Shanghai branch of China Merchants Bank (CMB) and the Hong Kong branch of Shanghai Pudong Development Bank (SPDB). On 17 October, Moody's downgraded both banks.

Downgrades

As result of this, Moody's has also downgraded L/C enhanced bonds issued by Double Charm Limited to Baa1 from A3 because the bonds' rating is directly linked to the rating of its L/C provider, CMB's Shanghai branch.

Similarly, the downgrade of Zhuhai Da Heng Qin Investment's bonds to Baa2 from Baa1 is because the bonds' rating is directly linked to the rating of its L/C provider, SPDB's Hong Kong branch.

Bank concerns

Moody's is concerned about the banks' standalone creditworthiness owing to growing risks in their funding profiles and increasing asset quality pressure as reflected in their recent financial results.

According to Moody's there has been an increasing divergence between the big state-owned Chinese banks and mid- and small-sized Chinese banks such as CMB and SPDB in their funding and liquidity profiles.

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