(Yicai Global) May 17 -- Three major private Chinese property developers confirmed late yesterday that they will issue yuan-denominated bonds this week after the authorities selected them as ‘demonstration property firms.’

To help Country Garden, Longfor Group and Midea Real Estate raise money on the open market, the underwriters will use credit protection tools such as credit default swaps or credit risk mitigation warrants, sources told Yicai Global.

Longfor will sell as much as CNY500 million of six-year notes tomorrow and the day after, with an indicative coupon rate of 3 percent to 4 percent. Midea Real Estate will issue CNY1 billion of four-year bonds on May 23 and 24, with an indicative rate of 4.1 percent to 4.9 percent. It is not known what credit protections they will employ.

Country Garden said it will shortly sell a tranche of corporate bonds worth CNY500 million to professional investors. The sale is still being planned and no specific proposal has yet been disclosed.

State-owned China Securities Finance Corporation together with major underwriters will facilitate the issuance of the two tranches by jointly setting up credit protection tools through a so-called private enterprise bond financing support program, according to industry insiders.

A source told Yicai Global that compared with previous bailout policies, where state-owned enterprises benefited more, the use of credit protection tools in bond sales is an important positive signal for mitigating the hardship of private firms. The person said he hoped more private developers can benefit from the tools in future.

With credit default swaps, if a creditor fears a potential future default, the CDS can be bought from the provider when the bond is issued. If the issuer does default, the creditor then gets a payout.

Credit risk mitigation warrants are provided by third-party institutions. In the event of a bond default, ratings downgrade, or other such risk event, the warrant holders can claim against the certificate provider. The warrant needs to be bundled with the bond at the time of issuance, but can be traded independently afterward.

Chinese regulators began to pilot interbank market credit-risk mitigation tools in 2010. So far, they have used four: CDS, CRMW, credit risk management assurance and credit-linked notes.

Editor: Peter Thomas