(Yicai Global) March 15 -- Rumors that regulators have recently issued window guidance easing the conditions for approvals for Chinese local government financing vehicles to issue corporate bonds have ruffled municipal bond markets.
"We learned from our research last week [LGFV companies] received window guidance," a bond analyst told Yicai Global. The main thrust of this was that regulators will scrap the 'single 50' limit for bonds that will mature in the next six months and for news ones used to repay old issues.
Originating in Japan, 'policy guidance,' as China's central bank refers to window guidance, advises financial institutions on controlling credit expansion and improving their loan structure, and urges them to lend rationally per the needs of the real economy. Also called jawboning, some commentators have likened it to a form of moral persuasion, public information shows.
The 'single 50' limit dictates that revenue contributed by local governments may not make up over 50 percent of a bond issuer's total over the past three years. This rule aims to restrain local financing platforms, whose operating revenue heavily depends on their local governments as shareholders, from issuing municipal bonds.
Called 'urban investment and construction bonds' in Chinese, municipal bonds issued through LGFVs fund cities' infrastructure or public welfare projects, with the proceeds from grant of land use rights serving as collateral.
They soon became the major funding channel for LGFVs since they are less limited than other local government bonds. The central government unveiled a series of policies in recent years that set financial thresholds for issues, because municipalities' inefficient use of money and excessive debts were spawning various systemic risks.
Jawboning Eases Refinancing Pressure
Scrapping the 'single 50' limit can ease the refinancing pressure on LGFVs to a degree, several analysts told Yicai Global. Window guidance, which takes place in the first quarter, a period when the pressure to repay peaks, can significantly improve municipal bonds' refinancing environment and impact issuing limits in other markets, Ming, chief analyst of fixed income at Citic Securities, explained.
The window guidance greatly benefits two kinds of LGFVs, said Liu Yuliang, chief analyst at Guosheng Securities fixed income unit. One is platforms that issued corporate bonds before September 2016 but have been unable to do so since then because of the 'single 50' limit. The other is platforms that once issued corporate bonds to raise money for provincial-level affordable housing projects. The policy guidance will allow these to issue new corporate bonds to pay off previous debts with newly borrowed money.
However, some bond market participants said delivering the policy effects to low-rated municipal bonds still needs time, though the message benefits LGFVs, since it solves the financing channel but does not address the issue of investors' low risk appetite, which remains a difficult problem for some low-rated LGFVs operated by counties and prefecture-level cities.
Maturity Builds Repayment Pressure
Excluding short-term and ultra-short-term financing bills, about CNY1.4 trillion worth of municipal debt will mature this year, with bonds worth about CNY67 billion puttable, per statistics by Golden Credit Rating. The institution believes that LGFV will find it hard to significantly improve their asset quality and profitability this year, while the operational risks of some are expected to increase.
LGFVs must repay CNY1.92 trillion worth of municipal bonds this year, which is slightly more than last year's CNY1.85 trillion, Sinolink Securities statistics show.
Considering many municipal bonds will mature this year, LGFVs will still face intense refinancing pressure unless the regulator substantially eases limits on new bond issues Zhou Yue, chief analyst of fixed-income research at Sinolink Securities said. The pressure peaks in March, with both mature and puttable bonds reaching the highest level over the year, he added.
A puttable bond lets its holder force its issuer to buy it back before maturity, with the repurchase price fixed at its issue, usually at par value, public information shows.
Jiangsu is the province most under the most pressure to repurchase and repay municipal bonds this year, a report from Sinolink Securities shows.
Zhejiang, Hunan, Guizhou and others face larger size of puttable bonds, while the cities of Nanjing, Suzhou and Zhenjiang come top in terms of the size of their mature municipal bonds. Guiyang, Shaoxing, Yancheng and others also need to buy back many.
Editor: Ben Armour