Offshore debt markets open up new financing channels

Offshore debt markets are fast emerging as alternative financing channels for local government financing vehicles and infrastructure companies.

Till date, at least five mainland-based LGFVs and infrastructure companies have sold a combined $3 billion worth of bonds in overseas markets. Four of these are first-time issuers, information compiled by China Daily showed.

The latest sale was by Anhui Transportation Holding Group Co, which made its debut on dollar bond market on June 4 by selling $300 million notes.

The company, a wholly owned provincial State-owned enterprise which builds and operates toll roads and public transport for the hinterland province, sold the three-year notes at a coupon of 2.875 percent. The sale was underwritten by BNP Paribas and other leading banks. It was assigned a BBB+ rating by Fitch Ratings and an A3 rating by Moody's Investors Service.

"The ratings are credit-linked with Fitch's internal credit assessment of Anhui province. The strong linkages are evident in the province's 100 percent ownership of the company...and the overall strong strategic importance of company's operations to the province," Fitch said in a statement.

Other issuers were also able to enjoy the support from their directly linked governments, who deemed such companies as strategically important to the region's development, thus least likely to allow them to default. For example, Beijing Infrastructure Investment Co, a wholly owned SOE of the local government and the builder and operator of Beijing's sprawling subway network, sold three-year notes of 5 million euros with a 1 percent coupon this March, a record low borrowing cost so far among LGFVs.

By comparison, three-year domestically AAA-rated LGFVs bond were sold at a 4.2 percent average yield in the onshore market until Tuesday, according to Chinabond.com.

The bond was widely chased by yield-hungry institutional investors in the US and Europe, for its relatively high yield and low risk. When Guangzhou Communications Investment Group, a toll road and public transport company fully owned by the Guangzhou municipality, sold its $400 million notes in late May, bidding was 11.5 times of planned issuance. The enthusiasm has pushed the issuance price to 3 percent, 35 basis points down the guidance price.

Overseas investors have a very short time, usually one or two days, to decide their purchases after issuers staged road shows, routinely in Hong Kong, Singapore and London, a banker involved in such deals said on condition of anonymity.

Issuers so far are concentrated in a handful of provincial SOEs and LGFVs under municipalities with strong credit profiles, such as Beijing and Guangzhou. There are more than 10,000 LGFVs in China.

Ivan Chung, senior vice-president of Moody's Investors' Service, said: "Overseas investors are positive toward 'quality' LGFVs who come from wealthier regions. Issuers so far are weak in their standalone financial profiles so government support, including tax and dividend refund, and subsidies, became critical. It might be difficult for overseas investors to embrace LGFVs from lower and poorer authorities."

SOEs in China are still subjected to stringent approval by domestic regulators when it comes to offshore funding, and complications in repatriation of bond proceeds remain a major hurdle, analysts said. Unlike general SOEs that often have overseas business operations and hence can use the borrowed foreign currency locally, LGFVs are exclusively domestic-focused and hence need to come up with complicated ways to transfer the money inward.

These set-ups, along with moves taken to hedge the currency risk, may add costs and make overseas fundraising less appealing.

Terry Gao, a senior analyst with Fitch, said another critical problem for overseas investors is they are desperate to know more about the underlying assets behind these bonds. Lack of information disclosure has hampered informed decisions and the pricing mechanism.