Linklaters advised Bank of China on the establishment of its US$5 billion (about $6.49 billion) China Covered Note Program and the initial offering by Bank of China London Branch of US$500 million (about $648.92 million China Green Covered Bonds due 2019 to be listed on the London Stock Exchange.
The notes will be secured on a portfolio of People’s Republic of China domestic climate aligned bonds held by Bank of China.
This is a landmark transaction since it is the first international note issue by a Chinese entity that is secured by onshore assets. The transaction features an international green bond issue secured by green bonds that are traded on the China interbank bond market.
The Linklaters team advising Bank of China was led by Capital Markets partners Andrew Carmichael, William Liu, Victor Wan and Michael Ng, and Managing Associates Sherry Cui, Leo Pan and Wayne Huang. Managing Associate Sherry Cui played a key role in the execution of the transaction.
“The Notes allows a broader range of international investors to gain access to the rapidly growing Chinese green bond market while at the same time, offering cheaper funding for the Issuer given the enhanced credit rating," Ng said.
“This innovative transaction includes a number of firsts, one being that it is secured on a portfolio of PRC domestic climate aligned bonds, but most importantly that it opens a new asset class for investors and it creates room for further development of collateralised obligations,” added Wan.
The notes offer noteholders dual recourse to both Bank of China London Branch and the collateral bond assets. The Notes require quarterly testing of the collateral pool to ensure that it is sufficient to repay the Notes if required and an obligation on Bank of China to top-up the collateral pool if its value in U.S. dollar terms falls below the specified threshold.
As a result of the credit enhancement, Bank of China will be able to achieve a 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 enables BOC to tighten up the pricing of the transaction. The coupon of 1.875% represents a credit spread of 95 basis points only, which reflects a tightening from BOC's existing senior notes.
“The offering really shows the PRC’s and Bank of China’s commitment to green finance and to enabling international investors to have exposure to Chinese domestic green financial assets. The PRC is developing the finance infrastructure for taking this forward,” Carmichael said.
“For example, no self-help remedy was available in relation to enforcement of pledged bonds that are deposited with China Central Depository & Clearing Co., Ltd. (‘CCDC’), one of the central securities depositories in the PRC, whilst in this offering we have seen CCDC adopt a pre-authorisation approach for the first time to allow the pledgee to enforce the pledge on an expedited basis.”
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