ARX Series 11 May 2023
Non-rating Action Commentary: More Low-tier LGFVs Are Issuing Offshore Bonds, with RMB Issuance Predominating
What's happening in the world of LGFV offshore bonds? Find out now as CSPI Ratings explores latest developments in this article.
In the past few years, offshore LGFV bond issuance has shown a generally upward trajectory. In 2021 and 2022, offshore bond issuance by LGFVs experienced high growth rates of 54% and 17.5% respectively, fuelled by favourable offshore issuance conditions and policies. However, in 2023, the scale of offshore issuance has significantly contracted due to a combination of continued interest rate hikes by the Federal Reserve and tighter offshore financing policies. The newly issued LGFV offshore bonds in the first four months of 2023 amounted to approximately USD8.6 billion, with 89 issues, representing a 52.5% decline in issue amount and a 30% decline in the number of issues compared to the previous year. Despite the decline in offshore issuance, the large overall due amount of LGFV bonds in 2023 means that the refinancing pressure on LGFVs remains significant. Additionally, LGFVs face rigorous restrictions on domestic financing. Therefore, we anticipate that LGFVs will continue to have considerable demand for offshore borrowing this year, and that offshore bond issuance will persist at a certain level.
The lower cost of offshore financing has been a primary factor attracting LGFVs to issue offshore bonds over the years. However, since 2022, there has been an inversion in the cost of issuing onshore and offshore bonds for LGFVs. In the first four months of 2023, the average issue yield of offshore LGFV bonds has further increased, with the average issue yield of 1-5 year bonds reaching 5.5%. The spread between the average issue yield of offshore LGFV bonds and that of domestic LGFV bonds in the same period has expanded to 0.8 percentage points. We believe the increase in the average issue yield of offshore LGFV bonds can be attributed to the persistent rise in US interest rates, a substantial increase of RMB-denominated issuance, and the growth in the number of low-tier (low administrative level) LGFV issuers. The overall decline in credit quality among LGFV issuers has pushed up the issue yield of LGFV offshore bonds. Nonetheless, we anticipate that offshore financing costs may ease over the long term as the Federal Reserve's interest rate hike cycle comes to an end, which could result in a return to normalcy in US monetary policy.
CSPI Ratings is a Hong Kong-based global credit rating agency. As licensed by the Hong Kong Securities and Futures Commission in 2012, and with a combination of global-grade analytical sophistication and a unique perspective from the emerging world, CSPI Ratings provides globally-benchmarked credit ratings and original credit research to the capital markets around the globe.
CSPI Ratings is a member company of China Securities Credit Investment (‘CSCI’), a leading credit technology service provider in China jointly founded by 35 Chinese financial institutions. CSPI Ratings is also a fully-owned international franchise of CSCI Pengyuan, a leading domestic credit rating agency in China. Between 2012 to 2022, CSPI Ratings operated with the renowned brand of “Pengyuan International”.