Linklaters advises on the first China Green Covered Bonds
Linklaters has advised Bank of China on the establishment of its US$5bn Medium Term Note Programme and the proposed initial offering by Bank of China London Branch of US$500m China Green Covered Bonds due 2019 to be listed on the London Stock Exchange.
This is a landmark transaction which includes a number of novel features, opens a new asset class for investors and creates room for further development of collateralised obligations.
These novel features include:
- This is the first green notes to be issued by a Chinese entity that is secured by green bonds that are traded on the China interbank bond market. The Notes will be secured by a pledge by Bank of China Limited of a collateral pool comprising PRC domestic climate-aligned bonds traded on the China interbank bond market.
- Although the Notes do not constitute “covered bonds” for the purposes of European regulation (such as the regulation governing UCITS), various structural features of a typical “covered bond” have been adapted for this transaction. In particular, the portfolio of green bonds will have an initial aggregate par value of 200% of the principal amount of the Notes, and this level is required to be maintained throughout the tenor of the Notes. The Notes also feature testing of the collateral pool by China Central Depository & Clearing Co., Ltd. on a quarterly basis against a reference asset coverage ratio of 150%. Where the ratio of the market value of the collateral pool versus the outstanding principal amount of the Notes is lower than 150% threshold, new qualified bonds will be added to top up the value of the collateral pool so that the asset coverage ratio will not be less than 175% after such top up. Furthermore, if any pledged bonds no longer satisfy the relevant eligibility criteria or are redeemed or repurchased prior to the maturity of the Notes, the Issuer shall substitute such bonds with new qualified bonds so that the asset coverage ratio will not be less than 175% after such substitution. As a result, Bank of China will be able to achieve an rating uplift to Aa3 by Moody’s, which is the sovereign rating of China, one notch higher than BOC's own credit rating of A1. The rating uplift enable BOC to tighten up the pricing of the transaction. The coupon of 1.875% represents a credit spread of 95 bp only, which reflects a tightening from BOC's existing senior notes.
- Whilst a standard pledge over bonds cleared by CCDC would not provide a self-help remedy for the pledgee, this transaction features a pre-authorisation mechanism for the first time to allow the pledgee to enforce the pledge on an expedited basis, without involvement of the pledger. Once CCDC receives a notice from the Trustee that the Notes are not paid at maturity or the Notes are accelerated following an event of default under the Notes, CCDC will initiate its auction process to liquidate the portfolio. A successful bidder will be required to pay the purchase price in RMB into a designated account for receiving liquidation proceeds maintained by CCDC within the High Value Payment System, the real time high value payment system operated by the PBOC. CCDC will accordingly remit the RMB proceeds out of China to the RMB clearing account of the Trustee maintained with Bank of China (Hong Kong) Limited.
- This transaction has been blessed by both the SAFE Beijing Branch and the PBOC. The SAFE Beijing Branch has specifically approved the remmitance of proceeds of the Notes into China, and the PBOC has specifically approved the remittance by CCDC of the pledge enforcement proceeds in RMB out of China.
- This is the first green notes to be issued by a Chinese entity that is secured by green bonds that are traded on the China interbank bond market.
- The Notes will be secured by a pledge by Bank of China Limited of a collateral pool comprising PRC domestic climate-aligned bonds traded on the China interbank bond market.
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