Chinese exchanges further tighten rules for LGFV bond issuance

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Chinese exchanges further tightened rules for bond issuance by local government financing vehicles (LGFVs), with measures including limiting quota for LGFVs from certain regions and asking some LGFVs to cut sizes of bond issuance which are used to roll over maturing bonds, reported by The 21st Century Business Herald and confirmed by multiple industry insiders.

Several industry insiders say that they have been informed of the changes by exchanges in Shanghai and Shenzhen, although the adjustments are only delivered through “window guidance” instead of formal notice, just like what they usually do about rules for LGFV bond issuance.

Recently, bond issuance for some LGFV projects in northern part of Jiangsu province were suspended and some issuers were told to cut the size when issuing LGFV bonds to roll over maturing debt, said a person at a Shanghai-based bank.

“For example, when an issuer applies to issue 1 billion yuan of LGFV bond to roll over 1 billion yuan maturing bond, it’s told to issue only 800 million yuan of bonds and the remaining 200 million yuan will have be provided by the LGFV,” said the person.

A person from another bank said that actual implementation of the adjustments will be according to specific projects and based on the ratio of outstanding LGFV bonds and local government fiscal revenue of the regions of the projects.

For regions where the ratio is high, some LGFVs may only be allowed to roll over maturing bonds but at a reduced size and some bond may not get approval at all, he added.

A person at bond financing department of a large bank said that is currently working on first-time bond issuance by a county-level LGFV in a provincial capital city, proceeds of which will be used to repay maturing interest-carrying debt, but it hasn’t received approval from the exchange.

A Beijing-based banker said that the China Securities Regulatory Commission (CSRC) and the exchanges did tighten rules on LGFV bond and real estate developers’ bonds. “Rules for real estate bonds have been tight for a while, and rules on LGFV bonds are moving to that direction,” he said.

Chinese regulators have maintained tight regulations this year. At the start of the year, the exchange and the National Association of Financial Market Institutional Investors (NAFMII) categorised LGFV bonds into difference types according to criteria used by the Ministry of Finance for local government bonds. The NAFMII impose different restrictions on bond issuers in different categories and bonds used for different purposes, although it didn’t official announced the categorised list.

The Ministry of Finance categorizes local government bonds into four types based on risks: red (debt ratio above 300%), orange (debt ratio lower than 300% but above 200%), yellow (debt ratio lower than 200% but above 120%) and green (debt ratio lower than 120%).

“When LGFV projects are submitted, someone will screen the projects according to the category list,” said the Shanghai-based banker. “The list was not published and even in the NAFMII and the exchanges, the list is confidential with only a few people having access.”

In April, the Shanghai Stock Exchange and the Shenzhen Stock Exchange released new guidelines to tighten rules for public bond issuance in China’s exchange market, including issuance of LGFV bonds.

Amid the tightening rules, LGFV issuance has slowed. According to Wind Information, 1.66 trillion yuan of LGFV bonds were issued this year as of November 17, rising by 7% from a year earlier and slowing significantly from last year.

Meanwhile, a total of 303 corporate bonds have been suspended this year as of November 17, including 164 LGFV bonds worth 278 billion yuan. Notably, the value of suspended LGFV bonds of issuers with AA and AA+ credit ratings reached 134.8 billion yuan and 105.8 billion yuan, respectively.