Local government-backed entities jump on offshore bond bandwagon

Less-developed regions persuade investors to part with millions of dollars

In late March, Yunnan Investment Group, a conglomerate wholly owned by the Yunnan provincial government, sold its first $300-million offshore bond, becoming the latest Chinese local government-backed entity or LGE to do so.

Global investors bought the notes with great enthusiasm. Knowledgeable persons told China Daily that the notes were oversubscribed 11 times. The coupon on the three-year bonds was squeezed to 3.375 percent.

Prior, Jiangsu NewHeadLine Development Group, a financing vehicle of Lianyungang, a city in eastern Jiangsu province, and Changchun Urban Development Investment Holding (Group), a similar company in northeastern Changchun, sold $200 million and $400 million worth of offshore notes respectively.

Tens of thousands of LGEs in China were established to raise funds for local governments to finance costly infrastructure and public facilities. For them, the domestic bond market was, and remains, a battlefield. Until recently, only a few elite LGEs with strong financial profiles, or solid support from wealthy municipalities, could tap the international market.

That landscape is changing, as more little-known companies from less-developed regions or cities jumped on the bond bandwagon, pushing overseas investors to know, for example, where Lianyungang is located. The trend has roots in LGEs' increasing international awareness, and overseas investors' growing appetite for high-yield assets.

Last year, LGEs issued nearly $6 billion bonds overseas. If power utilities and toll road projects are included, it would be around $7 billion to $8 billion, according to Fitch Ratings, which rated almost all such issuers. All are in well-off eastern regions, and are backed by provincial-level governments. This year, however, has seen lower-tier entities joining the party.

For example, Jiangsu NewHeadLine is backed by a prefecture-level government, and it was rated "BB+" by Fitch, a rare non-investment rating. Notes issued by it carried a coupon of 6.2 percent, and were oversubcribed seven times.

The creditworthiness of these standalone companies usually does not warrant such rating. Their strong credit link, and their businesses' strategic importance to local municipalities, are cited as major reasons by Fitch, and other such agencies, to issue such ratings.

The offshore issuance, unlike in the past, is not cost-driven. The 6.2 percent coupon rate of Jiangsu NewHeadLine is higher than its onshore rate for similar bonds. LGEs are driven by their desire to get global exposure and diversifying funding channels.

"We're not short of money, but we lack good partners. We need to know investors and they need to have qualified resources in overseas markets," Gao Feng, CEO of the Changchun company, said.

"Even the offshore cost is not competitive compared with onshore, and you have to consider foreign exchange risk. LGEs are willing to tap the foreign market because they want to make sure they have alternatives when the domestic market tightens," said Mao Saifeng, an analyst with Fitch.

Terry Gao, director of Fitch's international public finance practice, said: "It is very likely that each issuance will be much smaller than those in the previous two years, but with greater issuance numbers."

The problem now is, LGEs' stingy issuance can't satisfy investors' appetite. Ivan Chung, head of regional credit research with Moody's Investors Service, said as developers flocked to onshore market for funding, there is a shortage of high-yield, low-risk bonds for investors.

The increasing volatility in the onshore market, as well as tapering expectation of a strong US dollar, would push more such firms to go abroad, he said. There are already several in the pipeline.