RBI allows banks to provide partial credit enhancement to corporate bonds

Will enable corporates to access the funds from the bond market on better terms

The Reserve Bank of India (RBI) has allowed banks to provide partial credit enhancement (PCE) to bonds issued by corporate entities and special purpose vehicles (SPV) for funding projects, subject to certain riders.

“Banks will be allowed to offer PCE only in the form of a non-funded irrevocable contingent line of credit. A view on allowing the PCE as a funded loan facility will be taken in due course, after reviewing the implementation and performance of the contingent PCE offered by banks,” the central bank said.

It added the purpose of allowing banks to extend PCE was to enhance the credit rating of bonds issued to enable companies to access funds from the bond market on better terms.

The aggregate PCE provided by all banks for a given bond issue would be limited to 20 per cent of the bond issue size. The PCE facility, to be provided at the time of the bond issue, will be irrevocable. The central bank said banks could offer PCE only in respect of bonds whose pre-enhanced rating was at least ‘BBB-’. Banks cannot provide PCE by way of guarantee.

 

RBI said banks providing PCE to bonds issued by a corporate entity or an SPV wouldn’t be eligible to invest in those bonds. They might, however, provide other need-based credit facilities, funded or otherwise, to the entity. RBI has urged banks to have a board-approved policy on PCE, covering issues such as the extent of the PCE, underwriting standards, assessment of risk, pricing and limits.

In case the PCE facility is partly drawn and interest accrues on it, the unpaid accrued interest will be excluded from the calculation of the remaining amount available for drawing, RBI has said. According to the norms, in the event of project failure or bankruptcy, the PCE must rank below the claims of the enhanced bond holders, in terms of repayment priority.

The norms say PCE facilities to the extent drawn should be treated as an advance in the balance sheet. Un-drawn facilities would be an off-balance sheet item and reported under ‘contingent liability’, RBI said.