LGFVs target more capital via bond issues

Offshore markets emerging as top choice for financing of utility projects

Bond issuance by local government financing vehicles (LGFVs) is likely to rebound in the offshore market next year; in fact, a number of them are already waiting in line, seeking regulator's approval, according to analysts.

After witnessing a sharp decline this year amid the tightened grip to rein in local government financing risks, some municipal construction investment companies are likely to regain their appetite to issue bonds overseas in 2018, according to Ivan Chung, head of Moody's China Credit Research and Analysis.

The companies, a major form of local government financing vehicles, raise funds to build city infrastructure and utility projects.

Bonds issued by LGFVs in the offshore market earned 1.35 billion yuan ($196.4 million) in the first half this year, down 38.4 percent compared to the same period in 2016, data from Wind Information showed.

The likely rebound is mainly driven by increasing financing demand from companies that have witnessed successful transformation, say, those that have turned into State-owned firms operated under market-based principles, according to Chung.

"The transformed companies will become part of what we called public finance issuers, a rising issuer class following State-owned and real estate companies that used to dominate in offshore market," he said.

The National Development and Reform Commission, one of major regulators in charge of offshore bond issuance, is handling a number of applications from municipal construction investment companies, following the recent approval of other applications, he said.

The increasing appetite comes with huge financing demand for infrastructure construction projects that are necessary to achieve goals set for the 13th Five-Year Plan (2016-20), according to Chung.

As of 2016, there was still around 26,000 kilometers of railway to be built in order to achieve the 150,000 kilometer target set for the five-year period, data from the National Bureau of Statistics showed.

Foreign investors' preference for stable, government-backed bonds will help meet the issuer's ultra-long-term funding needs for railway projects, according to Chung.

Real estate companies currently issue the most bonds, but they may slow down their pace to raise funds in the offshore market, as the government is reluctant to see the sector taking on too much debt.

Containing the overall leverage ratio has been listed among key tasks of the government, according to a document released after a meeting of the Political Bureau of the Communist Party of China Central Committee held last week.

"We do not rule out the possibility that offshore bond issuance by real estate companies might decline next year," said Cheng Chunshu, deputy director of Golden Credit Rating International. "The government might level regulation over both domestic and offshore financing channels."