Thursday, October 15, 2015

RBI allows Partial Credit Enhancement in Corporate Bonds

The Reserve Bank Of India has allowed banks to provide Partial Credit Enhancement (PCE) to bonds issued by Corporate/Special Purpose Vehicles (SPVs) for funding all types of projects, subject to guidelines. Banks can now provide PCE to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit, which will be drawn in case of shortfall in cash flows for servicing the bonds and, thereby, improve the credit rating of the bond issue. The aggregate PCE provided by all banks for a given bond issue shall be limited to 20% of the bond issue size and the PCE facility shall be provided at the time of the bond issue and will be irrevocable. Banks may offer PCE only in respect of bonds whose pre-enhanced rating is BBB-minus or better. Banks cannot provide PCE by way of guarantee and those providing PCE to bonds issued by a corporate/SPV will not be eligible to invest in those bonds. They can, however, provide other need-based credit facilities (funded and/or non-unded) to the corporate/SPV. PCE exposure to a single counterparty or group of counterparties shall not exceed 5% of the bank’s single borrower/group borrower limit to the counterparty to whom the PCE is provided. The aggregate PCE exposure of a bank shall not exceed 20% of its Tier-1 capital.


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