Bank of China plans to issue what it is calling a “green covered bond” in US dollars soon, it announced yesterday (Monday), with a portfolio of domestic green bonds as collateral, although the deal’s qualification as a covered bond has been queried.

The Chinese bank’s project comes after green finance was on the agenda at a G20 summit in China last month and with Bank of China (BOC) having raised some $3bn (Eu2.76bn) in green bonds in July.

China does not have covered bond legislation and no covered bonds have been issued from the country.

A three year Reg S transactions off a new $5bn MTN programme is envisaged after investor meetings in Asia tomorrow (Wednesday), taking in Hong Kong and Singapore. Bank of China, Citi and HSBC are joint global coordinators, and are joined as joint bookrunners and joint lead managers by BAML, Barclays, Crédit Agricole, SG and Standard Chartered.

The forthcoming transaction is being touted as a covered bond because of its dual recourse nature: it will be senior debt backed by a portfolio of assets deemed green under a Chinese framework. These Qualifying Green Financial Assets are traded onshore on the China Inter-bank Bond Market (CBIM) and used to finance projects such as renewable energy, pollution prevention and control, clean transportation, and sustainable water management.

“International investors can benefit from the fundamental credit support from BOC as the primary obligor, while for the first time accessing China’s domestic green credits as a new asset class,” according to a roadshow presentation.

A banker close to the deal said that this reflects a key aim of the project, which is to provide a stepping stone for international investors to move towards greater participation in China’s onshore market. At the same time, a UKLA listing is a signal of China’s international participation, he added.

The roadshow presentation indicates that the collateral will be independently monitored – with respect to its green credentials and credit quality – and that the issuer will have to top up the cover pool if it falls below certain levels. The level at which a trigger for such topping up is set is yet to be finalised, according to the banker, but he said that overcollateralisation will be “meaningful”. It has not been confirmed if the deal will be rated – BOC, which is acting through its London branch, is rated A1/A/A by Moody’s, S&P and Fitch.

Some covered bond market participants have questioned whether the use of the “covered bond” name is appropriate for the project. Commerzbank analysts, for example, said that the structure does not appear to be in line with the European Covered Bond Council’s Covered Bond Label initiative.

“First, because we understand the bonds will neither be subject to a special covered bond legislation nor respective public supervision,” they said. “Second, because the collateral assets are not conforming to the traditional model.

“We still remember quite vividly the discussions whether SME loans could provide proper collateral for a covered bond, and we had the impression that the market had become fairly critical on any such broader interpretation of the covered bond term. It is probably not without reason that Sumitomo and Goldman Sachs labelled their joint-issuance project SumitG as ‘guaranteed secured obligations’ instead.”

However, the Commerzbank analysts saw positives in the development.

“We welcome the fact that the covered bond concept could gain further international recognition through such projects,” they added, “and no-one will disagree that conquering the Chinese market would represent another milestone for the product class.”

Berlin Hyp issued the only green covered bond, although MünchenerHyp and Kutxabank have sold socially responsible covered bonds.