News
China defaults spread to LGFVs
Bonds XPCC saga raises concerns over support for local government vehiclesBY INA ZHOUA state-run organisation tasked
with defending China’s western
border missed a payment on
Rmb500m (US$72m) of onshore
notes last week, triggering
arguably the first bond default
from a local government
financing vehicle.
An investment holding
company under Xinjiang
Production and Construction
Corps, which oversees 14
divisions and 179 regiments
across Xinjiang Uyghur
Autonomous Region, failed
to make full payment on
Rmb500m of 5.89% 270-day
notes due on August 13.
XPCC 6TH DIVISION STATE-OWNED
ASSETS MANAGEMENT , the issuer
of the notes, confirmed the
missed payment in a statement
last Monday, before making
good on its obligations two days
later. In Monday’s statement,
the issuer called the missed
payment a default, even thoughthe original offering circular
did not clearly define the term
and prevented creditors from
taking action for 15 days.
The episode shocked many
investors who assumed full
government support for
XPCC given its unique role
in safeguarding the country’s
western frontier.
XPCC, set up in 1954 under
the orders of Chairman Mao
Zedong, has its roots in the
traditional Chinese tuntian
system, a policy of settling
military personnel in frontier
areas to convert remote land
to agricultural use. It has built
farms, towns and cities, and
provided land and work for
disbanded military units, with
interests ranging from cotton
production to mining and
construction.CHALLENGING ASSUMPTIONS
“The market had not expected
at all that the first LGFV default
would have been from unitsof XPCC,” said a Beijing-based
bond investor with a large
securities house.
“It was known that XPCC had
a heavy debt burden, but given
its special position, the market
used to be very complacent
about the government backing
for XPCC,” he said.
A former DCM banker who
pitched the issuer several years
ago and arranged bond deals
for two other divisions of XPCC
echoed that view.
He recalled most of the XPCC
units he visited generated very
low margins from agriculture,
their main business, and mostly
had to rely on funding from
XPCC to repay debt.
“It was the belief in strong
support from both central and
local government that gave
us the confidence to do those
bond deals,” he said.
Market participants
speculated that the issuer
sourced the funding to cure
the default externally as it wascaught in a liquidity crunch.
According to its financial
report, the issuer held
Rmb674m of cash as of the
end of March, while its short-
term debt had shot up to over
Rmb6.5bn.
In the wake of the default,
Shanghai Brilliance Credit
Rating downgraded the rating
on the issuer to C from AA on
Tuesday.
Last Thursday, Caixin, a
Chinese financial magazine,
reported the chairman of the
XPCC 6th Division State-owned
Assets Management had been
placed under investigation after
the incident. IFR was unable to
verify the report.
The issuer could not be
reached for comment.LGFV OR SOE?
Both the former DCM banker
and the investor credited the
issuer as an LGFV in that each
XPCC division corresponds to a
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