Regulators on the Chinese mainland may already have banned the use of standby letters of credit (L/Cs) to enhance offshore bond issues.

As reported at the end of February, Beijing Energy's decision to include a standby L/C in its debut US dollar-denominated bond may have been one of the last of such issues (DC World News, 28 February 2014).

Core problem

While this appears bad news for advocates of L/C enhanced bonds, this particular structure may anyhow become redundant, whether it is banned or not.

The reason for the L/C enhanced bond is that it addresses the core problem facing mainland issuers wanting to raise capital offshore, which is that China's capital controls prevent them from pledging onshore assets to back offshore bonds.

Public consultation

That position may change. On 13 February, the State Administration of Foreign Exchange launched a public consultation on allowing mainland parents to guarantee bonds issued by offshore subsidiaries.

Meanwhile, confusion reigns over the status of L/C enhanced bonds. The People's Bank of China reportedly banned the mainland's largest four banks from providing L/Cs for offshore bonds issued by mainland companies.

Analysts meanwhile say that the enforceability of support arrangements in these structures is questionable because it is unclear how offshore investors could lay claim to mainland assets in the event of a default.

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