China LGFVs pass latest test
Bonds Yunnan bailout comforts investors as offshore issuance surgesBY CAROL CHAN, INA ZHOUA default scare in China’s
onshore debt markets has put
the spotlight on the country’s
local government finances at
a time when more financing
vehicles are turning to the
offshore markets to raise
funds.
Last week, news that YUNNAN
STATE-OWNED CAPITAL OPERATION
(Yunnan Capital) failed to meet
repayment obligations on time
on two trust loans sparked a
sell-off of some US dollar bonds
of local government financing
vehicles, especially those from
Yunnan province.
The incident also forced
Yunnan Capital to postpone a
non-deal roadshow that had
been scheduled for January 16
in Hong Kong, according to
two market sources. Yunnan
Capital registered with the
National Development and
Reform Commission to selloffshore bonds last year, but no
issue has materialised so far.
The sector rebounded
soon after the provincial
government helped Yunnan
Capital repay in full the
overdue trust loans –
reinforcing expectations of
state bailouts for issuers that
run into trouble.
Still, the episode has raised
fears that LGFVs may start to
default in the bond market
this year after a surge of
issuance from the sector and
amid ongoing reforms to curb
excess capacity. So far, no
Chinese LGFV has defaulted
on its publicly traded debt in
either the onshore or offshore
markets.
“Any default may trigger a
chain reaction that may affect
the accessibility or funding
costs of other local SOEs in
the same province or city. But
the problem is, do all these
local governments have theresources to rescue SOEs from
their difficulties, in particular
the small counties or cities in
China’s poorest provinces?”
said Ivan Chung, associate
managing director at Moody’s.
On December 15, Yunnan
Capital missed payments
on more than Rmb900m
(US$140m) borrowed through
two trust products issued
in the name of Zhongrong
International Trust. The missed
payments were the first known
default of off-balance sheet,
or shadow, loans of local
governments, Reuters reported
on January 14.
In the offshore market,
yields on LGFV bonds edged
higher.
The bid yield of Yunnan
Metropolitan Construction
Investment Group’s 3.125%
2019s jumped around 25bp last
week, according to Thomson
Reuters data. Both Yunnan
Provincial Investment HoldingsGroup’s 3.375% 2019s and
Yunnan Provincial Energy
Investment Group’s 3.75%
2020s rose around 6bp.
Yunnan Capital managed to
repay in full the overdue trust
loans to Zhongrong on January
16 as it secured financing
from some institutions. It is
now set to get Rmb2bn in
additional equity capital from
the provincial government,
according to Reuters.
In a statement dated January
16, Yunnan Capital said the
delay in repayment of the
trust loans was due to some
difficulties in the transfer of
funds among related parties.
It also claimed that the
incident was not a default
as Zhongrong, after mutual
discussion, had agreed to
postpone the repayment date
to January 19 or earlier.
“The news, of course, has
some negative impact on
market sentiment towards
LGFV bonds, but it is only
temporary and won’t last
long,” said Steve Wang, head of
fixed-income research at BOC
International.CMB tackles first Aussie LBO
Loans Chinese bank dishes up pet food LBO financingBY EVELYNN LIN,
PRAKASH CHAKRAVARTIChina Merchants Bank has
become the first Chinese bank
to lead the financing of a
leveraged buyout in Australia,
marking another step in the
aggressive overseas expansion
of mainland lenders.
CMB won a sole mandate
on a A$400m (US$315m) loan
for the acquisition of REAL
PET FOOD (RPFC), supporting a
consortium of predominantly
Chinese investors on the A$1bn
acquisition. It launched the
loan into syndication last week.
While the loan is not
large, several bankers say
the structure will test CMB’s
syndication skills because of
its long tenor, relatively high
leverage and tight pricing.The senior facility, split into
a A$375m term loan tranche A
and a A$25m revolving credittranche B, carries a seven-
year door-to-door tenor, with
a blended average life of 5.years and a leverage multiple
of 5.02x, based on RPFC’s
estimated Ebitda of slightlyNews