A standby letter of credit (L/C) facility is backing a loan for Chinese pork producer Shuanghui International's bid for US-based Smithfields Foods.

The deal is unusual, with the US$4 billion loan package including a US$3 billion standby L/C-backed five-year loan, making this the largest such financing for any acquisition attempt by an Asian enterprise.

L/C enhanced loans

Another unusual aspect of the deal is that L/C-enhanced loans are usually arranged for lower-rated companies than Shuanghui that require the backing of the issuing bank to make the terms attractive.

With the default risk transferred to the L/C provider, borrowers raise funds at better rates than they would obtain alone and raise larger amounts of money.

Bank backing

Using the L/C-enhanced loan to finance Asian acquisitions was last seen in 2007 when India's Suzlon Energy acquired Germany's REPower for EUR 1.35 billion.

State-owned Bank of China is backing Shuanghui's US$7.1 billion bid for the US-based food producer.

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