China’s banks ready to support huge M&As

Use of standby letter of credit shows government support for private sector borrowers.

Banking support for Chinese mergers and acquisitions was illustrated in a loan backed by a standby letter of credit for Chinese pork producer, Shuanghui International.

Bank of China, one of the Big Four state-owned banks, is financing Shuanghui’s US$7.1 billion purchase of Smithfield Foods, the world’s largest food company, with a US$4 billion loan package that includes a US$3 billion standby letter of credit-backed five-year loan. It is China’s largest such financing.

The size and tenor of BOC’s commitment surprised the market and is seen as a display of support for a private-sector borrower. Analysts noted that loans backed by standby letters of credit are usually arranged for lower-rated companies not easily bankable in the loan market and that would have to pay a higher premium for funding.

By transferring default risk to the letter of credit provider, the arrangement helps borrowers raise funds at lower cost than their standalone credit profile would allow, as well as helping to raise larger amounts of money.