(Bloomberg) — A state-owned firm in China’s Guizhou province is selling bonds to help repay debt issued by a local government financing vehicle, a rare move that highlights the region’s liquidity strains.
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Guizhou Hongyingda Construction Project Management Co., a wholly-owned subsidiary of the finance bureau of Xixiu district in Anshun city, issued a 1.8 billion yuan ($250 million) five-year non-public bond Friday with a coupon of 4.8%, according to a filing on Shanghai Stock Exchange’s private disclosure platform seen by Bloomberg.
The security was rated AAA by domestic ratings agency CSCI Pengyuan Credit Rating Co. as it’s fully guaranteed by Guizhou State Owned Asset Operation Co., a wholly-owned unit of the province’s finance bureau.
The proceeds of the private note will go toward repaying or refunding two bonds sold by Anshun Xixiu Qiancheng Investment Development Co., an LGFV in the region, according to the prospectus seen by Bloomberg. Although based in the same district, Guizhou Hongyingda has no direct equity relationship with Xixiu Qiancheng Investment.
“It’s extremely rare for a company to issue bonds for an entity without a direct equity relationship,” said Wang Chen, co-founder of Belt&Road Origin (Beijing) Tech Co., a provider of credit-risk analysis. “The move signals a new channel for LGFVs’ debt repayment. It will be conducive for debt-laden regions to help weak LGFVs in repaying debt, especially bonds sold in the open market.”
The unusual decision for a state-owned enterprise to raise funds for an LGFV is a sign Guizhou province, one of the poorest and most indebted regions of China, is stepping up efforts to address the financing pressures brought on by maturing LGFV debt.
The spreads on lower-quality LGFV bonds over comparable government notes narrowed on Friday, suggesting investors were growing increasingly confident over the sector’s ability to repay debt. Spreads of LGFV bonds with ratings of AA- shrank five basis points to 288 basis points, the tightest since 2018, according to data compiled by Bloomberg.
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