Financially strained Chinese borrowers are facing a lack of credit-enhanced US dollar denominated bonds backed by standby letters of credit (L/Cs) as the slump in China's housing market causes concerns about defaults amongst lenders.

Those concerns were highlighted in September when Sino Ocean, one of China's largest real estate developers, said it would temporarily stop making payments on US dollar-denominated bonds while it embarked on a wider debt restructuring.

Plummeting bond market

The sale of the credit-enhanced bonds with standby L/Cs providing a lender's commitment to repay if the issuer defaults, has plunged by 90 per cent to US$1.04 billion this year compared to the previous year, according to data compiled by Bloomberg.

This outpaces a 52 per cent drop in China dollar bond sales to US$52.2 billion for the same period the data showed.

Bank reluctance

This decline is attributed to banks' reluctance to offer such guarantees amid the financial struggles of the nation's developers.

The market shift is affecting lower-rated companies, including local government financing vehicles, which raised a record US$10.3 billion in 2022.

L/C doubts

The structure of standby L/Cs has raised doubts among investors, and recent defaults by major builders have contributed to the market upheaval.

Sino-Ocean raised US$200 million from a three-year bond backed by a standby L/C in 2022 (DC World News, 27 April 2022)

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