China’s local government financing vehicles (LGFVs) will likely receive less funding in the coming months due to the coronavirus outbreak, but default risks of the platforms' bonds will remain low, say credit rating analysts.
Terry Gao, head of Asia Pacific international public finance at Fitch Ratings, said the coronavirus outbreak will unlikely lead to default cases in LGFV bonds, which are popular with local institutional investors, at a media briefing on Tuesday (February 25).
This is thanks to previous government efforts to rein in non-standard debt funding in the LGFV sector and the initiatives to better monitor and control their debt growth in the past three years, he said.
"There could be as many as eight to 10 different platforms under local governments, some of them were stronger and some were weaker. But many of these platforms were consolidated in the past few years," he said.
This enables the governments to better monitor the indebtedness level, manage the vehicles' debt maturity and capital structure, consolidate the local resources and lower funding costs, he added.
Moody’s also said in a report on February 25 that LGFVs, which typically spend most of their debt proceeds on infrastructure projects or public sector related business, won’t have immediate refinancing risks due to the outbreak. It noted that they will continue to receive government support, maintain their funding access and benefit from credit easing measures.
However, the epidemic is credit negative for Chinese LGFVs overall. It will likely delay or reduce the funding the vehicles receive from their regional and local government owners in the first half of this year, Moody’s said.
“The outbreak will likely weaken local economies and government revenues. As such the timely implementation of government support to LGFVs, such as ordinary payments, subsidies, capital injections and refund of land sales revenue, could be weakened,” the ratings agency noted.
LGFVs and local state-owned enterprises (SOEs) that provide urban transportation and utility services will also generate less revenue than they otherwise would, given the reduced traffic volumes and industrial activities amid the outbreak. Infrastructure projects that LGFVs are undertaking will also likely be delayed, it said.
YIELD WILL LIKELY FALL
The majority of the investors for the LGFV sectors are still Chinese investors. However, international investors are increasingly participating in the investment-grade area, such as sovereign wealth funds or some multi-national investment funds, Gao said.
The yield level of LGFV bonds has been falling in recent years as they faced more restrictions in investing in risky assets through unregulated channels. Yields will likely remain low this year, especially for the investment grade vehicles, as investors seeking return continue to invest in this relatively safe type of asset, he said.
Depending on their respective ratings, the average yield for LGFVs bonds can range from 2.5% to 3%, up to 8% to 9%. However, these yields have generally tightened by around 100 to 200 basis points since the beginning of 2019.
The outstanding LGFV bond balance is around Rmb7 trillion to Rmb8 trillion ($995 billion to $1.14 trillion), which is a similar level to the end of 2018 following a government campaign to control local government debt growth. Offshore LGFV bond balance accounts for around 5% of the total LGFV bond balance.
Some observers believe that Beijing will boost infrastructure investments later this year to support its economic growth.
Once the situation stabilises, the Chinese government might increase infrastructure investments to offset the negative impact from the coronavirus outbreak and stimulate economic growth. LGFVs will continue to play a key role in executing these projects, Moody’s said.
However, Fitch took a different view, arguing that the central government will adopt stringent policies and measures to control the debt growth of LGFVs.
“As such, we don’t expect there will be a jump in bond issuance of LGFVs. Instead, we expect to see more debt raised via general or special municipal bonds,” Gao said.
