HONG KONG, 8 April 2021. Pengyuan International has today published a research report “A Review of LGFVs’ Risk Characteristics Based on Non-standard Product Defaults”.
China’s local government financing vehicles (LGFVs) have reported more cases of non-standard product defaults since 2018 after the government strengthened the regulatory efforts and oversight over the sector’s financing. According to the statistics, China has seen 90 non-standard product defaults by LGFVs involving 117 entities (including both issuers and guarantors) from January 2018 to November 2020. A large number of default cases happened in provinces including Guizhou, Yunnan, Inner Mongolia and Sichuan, with higher proportion of defaults by county-level LGFVs and LGFVs with no bond issuance record. In addition, it is worth noting that when a prefecture-level LGFV reports defaults, it is typical that the lower-level LGFVs under its jurisdiction may have already reported defaults several times.
From the perspective of regions, those with non-standard product defaults have relatively weak economic strength, high debt ratio, high exposure in non-standard products and weak financing capacity. Regarding the issuers’ financials, short-term debt service ability of those LGFVs with non-standard product defaults declines rapidly and their short-term debt service pressure exacerbates substantially. The short-term debt as a percentage of total debt of LGFVs that have reported non-standard product defaults rose rapidly, from 13.58% at the end of 2016 to 24.34% at the end of 2019, while the cash to short-term debt ratio decreased from 5.73 in 2016 to 0.31 in 2019. In addition, the external guarantee as a percentage of net asset of bond-issuing entities with non-standard product defaults continues to grow in recent years.
LGFVs that have reported non-standard product defaults have a greater impact on themselves and other LGFV bonds in the same region, while these defaults influence less on LGFV bond issuance in their respective higher administrative level. The LGFVs in the default region subsequently turn to private placement with shorter maturity and higher interest rate for refinancing. LGFV bond issuance in non-standard product defaults regions will be greatly reduced if there are no remedial measures to boost market confidence. According to our observation, 70.27% of LGFV issuers stopped LGFV bond issuance following reports of their respective non-standard product defaults. In addition, 51.35% of the regions no longer issued LGFV bonds following their respective LGFVs’ non-standard product defaults.
We believe identifying the risk of non-standard product defaults by LGFVs could help prevent risk contagion in a timely manner. The process involves the framework of analysing traditional LGFV risk through local economic and fiscal strength, LGFV status, operating profile, financial risk and external support. Special attention should be paid to regions with high debt ratios, high proportion of non-standard debt assets and weak financing capabilities. We should also stay vigilant of the rapid decline in the short-term debt service ability of LGFVs.
Date of Relevant Rating Committee: 7 April 2021
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