China's LGFV bonds to top offshore dollar debt issuers in 2022 as market grows tired of defaults and delayed payments by developers
South China Morning Post
4 min read
China's local government financing vehicles (LGFVs) will remain one of the largest groups of offshore bond issuers this year, as they increased their fundraising amid the market's general loss of appetite for real estate developers.
LGFVs are likely to remain the top sellers of offshore debt after their US$28 billion issuance propelled them to the top last year, according to Moody's Investors Services. LGFVs made up a quarter of China's 2021 corporate debt fundraising, Moody's said.
The debt sold by these local government fundraising vehicles - semi-municipal bonds - has filled in the vacuum of high-yielding debt sold by property developers, as a sluggish real estate market and a record bout of defaults and missed payments deterred many global investors. LGFV issuance soared 184 per cent as of the end of April from a year earlier, according to Pengyuan International.
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"Some LGFVs at lower administrative levels have been diversifying their funding channels via offshore markets due to tightened regulations on the use of proceeds from new onshore issuance," said Zhang Shuncheng, an associate director at Fitch Ratings.
Aerial photo of the Chengdu Tianfu International Airport in Chengdu on May 31, 2021. Photo: Xinhua alt=Aerial photo of the Chengdu Tianfu International Airport in Chengdu on May 31, 2021. Photo: Xinhua>
Chinese companies issued a third fewer dollar bonds in the year to May 5, slashing the proceeds by 45.3 per cent, according to data compiled by Refinitiv. Property developers, among the biggest corporate borrowers in China, sold only 10 dollar bonds this year, making up 4.3 per cent of the total, a drop compared with the 44 issues and 20 per cent market share in the same period last year.
The final week of April saw at least five LGFVs issuing dollar bonds. Huai'an Development Holdings, an LGFV operated by Huai'an's city authorities of Jiangsu province, sold a US$200 million three-year bond. Chengdu Airport Xincheng Investment issued US$500 million from a three-year note. Lanxi Transportation Construction Investment Group in Zhejiang province and Chongqing Nan'an Urban Construction & Development Group also issued dollar bonds.
The issuances were boosted by banks' credit support, with Xi'an Chanba Development Group backed by Hengfeng Bank's Xi'an branch and Lanxi backed by Bank of Ningbo. Under the so-called standby letter of credit (SBLC), banks guaranteed payment to the creditors if the issuers failed to make payments.
Chinese property developers - especially high-yield issuers - have issued fewer bonds amid a sluggish property market, and as investors had lost their appetite from the frequent spate of defaults and delayed payments by a string of issuers such as China Evergrande Group and more recently Sunac China Holdings.
Property developers are likely to cut back on their bond sales for the remainder of 2022, as US$18.5 billion of offshore bonds and 91 billion yuan (US$13.6 billion) come due in the second quarter. That would help LGFVs stand out, said Moody's associate managing director Ivan Chung.
Visitors at a real estate fair during the National Day "Golden Week" holiday in Huai'an city of Jiangsu province on October 7, 2018. Photo: Reuters. alt=Visitors at a real estate fair during the National Day "Golden Week" holiday in Huai'an city of Jiangsu province on October 7, 2018. Photo: Reuters.>
"LGFVs issuance will continue to grow, although [it] may slow down because of rising US interest rates, which [increase] the offshore issuance cost, " he said. "But they will still need to issue US bonds to support their US$35 billion refinancing."
Credit spreads for LGFV have widened, but they still provide "reasonably good value", with yields of at least 4.5 to 5.5 per cent, compared with 3 to 4 per cent among other investment-grade bonds, said George Sun, head of global markets for Greater China at BNP Paribas.
"Onshore investors generally [hold the] view that they know the projects and the local government [issuers] quite intimately," Sun said. "This explains why they tend to be more bullish on LGFV bonds than foreign investors, and like both their US dollar and yuan issuances."
Villagers use a wooden boat to transfer their pigs from a flooded hog pen in Lanxi city in Zhejiang province on June 20, 2011. Photo: AP alt=Villagers use a wooden boat to transfer their pigs from a flooded hog pen in Lanxi city in Zhejiang province on June 20, 2011. Photo: AP>
The offshore funds that LGFVs raise will jump at least 10 per cent in 2022 due to the robust financing demand amid China's acceleration of infrastructure investment, Pengyuan said.
"The trend in the second half will mainly depend on policy changes," said Pengyuan's analyst Jameson Zuo. Regulators may increase their scrutiny on offshore issuance by LGFVs, as the National Development Reform Commission (NDRC) said it would enhance controls on the offshore debt of property developers, LGFVs and low-rated firms, he said.
Property developers may resume selling debt in the second half, as credit spreads are likely to tighten starting from the late-third quarter and this makes it cheaper for issuers to tap the market, Sun said.
US dollar bonds from Chinese issuers traditionally account for half of Asia's high-yield bond market.
