Data and media company Bloomberg has expressed concerns over the now widespread use of standby letters of credit (SBL/Cs) to enhance China’s offshore bonds.
Bloomberg describes the practice of state-owned lenders providing SBL/Cs for such offerings as “a tried and tested way of ensuring the weakest get money.”
In the past eighteen months, lenders have backed US$9 billion of Chinese offshore bonds with SBL/Cs, thus guaranteeing payment if the borrower fails on its repayment obligations according to Bloomberg data.
The data also reveals that a record 83 percent of offshore bonds over the same period were enhanced by SBL/Cs.
Bloomberg’s worries over the widespread use of SBL/Cs in this context find some support in banking circles.
“From the bank’s perspective it’s concerning because these SBL/Cs are not fully reflected in the books and are typically recorded as contingent liabilities, which don’t affect leverage metrics,” head of credit research for Asia ex-Japan at Schroder Investment Management, Raymond Chia, told Bloomberg.
SBL/Cs are so prevalent they may as well stand for “slowly building leverage in China,” he added.
Impaired credit profile
China’s unhedged foreign debt is heading towards US$1 trillion and by using SBL/Cs the nation is effectively exporting the debt of its riskiest companies to international investors according to Bloomberg.
It concludes that their use has the potential to impair the credit profile of China’s banks, which are already grappling with bad debts that rose on average 38 per cent last year.
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