Research Publication: A Review of LGFVs’ Risk Characteristics Based on Non-standard Product Defaults


08 Apr 2021

    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.

    ANALYSTS CONTACT

    Primary Analyst

    Brian Lam

    +852 3615 8339

    brian.lam@pyrating.com

    Secondary Analyst

    Jameson Zuo

    +852 3615 8341

    jameson.zuo@pyrating.com

    Committee Chair

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@pyrating.com

    MEDIA ENQUIRIES 

    Ms. Charley Lui 

    Direct:+852 3615 8296

    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES

    Mr. Allen Wei

    Direct:+852 3615 8324

    allen.wei@pyrating.com

    Date of Relevant Rating Committee: 7 April 2021

    Additional information is available on www.pyrating.com


    DISCLAIMER

    Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”) prepares various credit research and related commentary (collectively “research”) in compliance with the established internal process. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.

    The research is subject to disclaimers and limitations. RESEARCH AND CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF RESEARCH AND CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.

    This research is based solely on the public data and information available to the authors at the time of publication of this research. For the purpose of this research, the Company obtains sufficient quality factual information from public sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses in the research. The Company is not responsible for any omissions, errors or inconsistencies of the public information used in the research.

    NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

    This research focuses on observing trends from the credit markets. This research has not been made available to any issuer prior its distribution to the public. The Company does not receive compensation for its research.

    The Company reserves the right to disseminate its research through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

    The Company’s research is not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.

    In the event of any dispute arising out of or in relation to our research, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.

    Copyright © 2021 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.