China’s local financing vehicles line up to issue US dollar bonds overseas as developers steer clear

At least 50 Chinese local government financing vehicles (LGFVs) are preparing to issue US dollar bonds offshore, according to a senior Moody’s analyst

PUBLISHED : Tuesday, 06 December, 2016, 6:37pm
UPDATED : Tuesday, 06 December, 2016, 7:58pm

At least 50 Chinese local government financing vehicles (LGFVs) are preparing to issue US dollar bonds offshore, according to Ivan Chung, head of Moody’s Greater China credit research and analysis.

The news comes as mainland Chinese developers are retreating from the US dollar bond market because of the rising yield and the devaluation of the yuan.

Most of the bonds are subscribed by Chinese institutions’ overseas branches, which are more familiar with LGFVs’ operating models, and are willing to accept a lower yield as it can be offset by an appreciating US dollar, according to investment bankers and credit agencies.

LGFVs are government-related entities engaged in building or operating public welfare and infrastructure projects, often on a non-profit basis.

They have sold US$10.8 billion US dollar bonds abroad so far this year, compared to $6.85 billion in the whole of 2015, Bloomberg data showed.

During roadshows in London and Singapore, LGFVs are frequently asked to explain their rationale for issuing US dollar bonds in the current environment, with many would-be investors deterred by the comparatively low yield and lack of financial clarity, or the high debt to asset value and poor cash flow of many such vehicles.

“Foreign investors are accustomed to Chinese developers’ bonds [which used to be a mainstay of US dollar high-yield bonds] so the LGFVs’ offer couldn’t satisfy them. They are more acceptable to transportation companies, but to those that are highly reliant on land sales and financially opaque, they are wary,” Chung said.

For LGFVs, there are many considerations beyond “cost” that have pushed them to go overseas. It gives them the opportunity to diversify their financing channels and boost their overseas profile, thereby attracting more foreign direct investment to their localities.

A investment banker with a major securities firms in Hong Kong, who has led many such deals but declined to be identified, said proceeds raised from such bonds can be counted as “foreign”investment, providing a major incentive for LGFVs to sell bonds offshore.

Rarely had LGFVs bought financial instruments to hedge their exchange risk, given that would sharply raise the cost, he added.

Many LGFVs believe they can refinance upon maturity of the bond three or five years later, but “it may not be the case”, Chung warned.