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China's state-owned banks support private sector M&As

China’s state-owned banks support private sector M&As

(18 June 2013 – China) China’s banks are ready to support mergers and acquisitions as the government steps in to support private sector borrowers, using standby letters of credit.

Recently Chinese pork producer, Shuanghui International was backed by Bank of China (BOC), one of the big four state-owned banks, with its US$7.1 billion purchase of Smithfield Foods, the world’s largest food company.

The US$4 billion loan package 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.

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