Business / Economy

Long before LGFV bonds take their curtain call, Moody's

By Dai Tian and Zheng Yangpeng ( Updated: 2015-06-12 13:40

Long before LGFV bonds take their curtain call, Moody's

Bond issued by local government financing vehicles (LGFV) will not bid farewell and become history soon, said a senior analyst of Moody's, as curbs on such financing are being eased.

It will take longer than expected, maybe nine years or even more, before LGFV bonds make their exit, said Nicholas Zhu, vice president of the global rating agency at Moody's China Credit Risk Conference in Beijing on Wednesday.

Moody's assigns ratings of no lower than A level to bonds issued at provincial level and by provincial capital cities as well as by deputy provincial units such as Tianjin Binhai New Area and Shanghai Pudong region. Such rating is at least three notches above the minimum investment grade.

"The central government is highly protective about the local bonds market," said Zhu, adding that latest regulatory policies are meant to promote a healthy development, which means the sovereign credit will support local governments.

"The difference in economic development among regions won't change the judgment to overall risk level," said Zhu, "as such case can be seen from the pricing of debts issued by less developed region such as Xinjiang."

The LGFV bonds, first created to sidestep a previous ban on direct debt raised by regional authorities, are seeing a revival in popularity after the National Development and Reform Commission lifted certain issuance restrictions.

The regulator announced in May that it had lowered the debt-to-asset ratio for LGFVs that need to provide guarantees to 65 percent, and loosened the ratios for AA+ and AAA rated LGFVs to 70 percent and 75 percent, respectively.

The move is expected to spur a new wave of bond issues by LGFVs to meet a huge financing shortfall in infrastructure investment.

The NDRC also lifted the debt-to-local GDP ratio for cities and counties. Enterprise bonds and medium-term notes issued by these jurisdictions can now be equal to a maximum of 12 percent of local GDP, compared with 8 percent previously.

"Most of the latest policies aims at helping local governments improve their debt structures, matching their investments and responsibilities with the debt maturity," said Zhu.

He took Jiangsu province as an example, as at least 80 percent of its local debts has been raised for infrastructure, which may have a construction and maintenance span ranging from 7 to 20 years. As of June 2013, more than one third of its existing debt has only one year to maturity.

The NDRC's policies, applicable to LGFVs as well as corporate debts, will have an amplifying effect on the bond market, added the senior analyst.

LGFV debt contributed to a 67 percent jump in regional liabilities from the end of 2010 to 17.9 trillion yuan as of June 2013, statistics released by Audit Commission showed. According to Bloomberg, LGFVs must repay a record 698.73 billion yuan of notes this year, compared with 304.1 billion yuan in 2014.

The Ministry of Finance launched a 1 trillion yuan debt swap plan on Wednesday to help local governments refinance their maturing debts, after a similar move in March, rolling over local bonds with lowered costs.

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