Chinese City More Famous for its Beer Plans First Perpetual Sale

Updated on
  • Qingdao City Construction to finish investor meetings today
  • LGFV onshore note sales have slumped 63 percent this year

A Chinese local government financing vehicle that’s already tapped international investors once this year for dollar debt is at it again, planning this time on selling notes with no set maturity as Premier Li Keqiang seeks to curb regional authorities’ yuan borrowings.

Qingdao City Construction Investment Group Ltd., the investment and financing platform of the northeastern coastal city of Qingdao, home to Tsingtao beer, has been meeting with investors in Singapore and Hong Kong ahead of possible offering, people familiar said. A dollar perpetual securities sale would be a first for a LGFV, whose issuance of regular foreign-currency bonds totals at least $3.9 billion this year, Bloomberg-compiled data show.

Chinese LGFVs, set up in their thousands from the 1990s to circumvent a law that banned local governments from raising debt directly, have cut yuan-denominated offerings by 63 percent this year to 488.7 billion yuan ($76.7 billion). Premier Li is phasing some LGFVs out and has also implemented a 3.2 trillion yuan debt swap program that permits regional authorities to swap high-yielding LGFV debt into lower-yielding municipal bonds.

“LGFVs would love to issue bonds overseas where they can borrow at lower costs and for longer terms,” said Xu Gao, an economist at Everbright Securities Co. in Beijing. “Onshore bond sales by LGFVs have declined this year as the government curbed local government debt.”

Qingdao City Construction Investment’s notes will carry a keepwell agreement and a cross border standby facility from its onshore parent. The facility acts as a type of credit enhancement, ensuring that Qingdao City will repay the bonds should the offshore issuing entity meet with some distress, according to Mao Saifeng, a credit analyst at Fitch Ratings Ltd. in Hong Kong.

Perpetual securities typically pay higher yields to compensate investors for their having no fixed maturity and the risk they won’t be repaid. Borrowers meanwhile are allowed to treat them as equity on their balance sheets, although rating companies use a weightings scale for the securities.

Qingdao City Construction Investment sold$800 million of dollar bonds in February in a two-part sale. Its $500 million of 4.75 percent notes due 2020 and sold at a spread of 370 basis points over Treasuries are trading at a 327 basis-point premium, Bloomberg-compiled prices show. Its $300 million of 2025 debentures pay a 5.95 percent coupon. That’s still 94 basis points lower than the highest rate Qingdao City Construction Investment is paying on some of its yuan notes.

Reports Loss

Qingdao City Construction Investment’s onshore parent reported a 322.9 million yuan loss in the first half compared with a 897 million yuan profit in the first six months of 2014, according to an offering circular for the planned perpetual notes. Total debt as at June 30 was 14 billion yuan, up 66.7 percent from the end of last year.

Proceeds from the planned sale will be used to replenish working capital and for other general corporate purposes, the people familiar with the matter said, asking not to be identified because the details are private.

Other LGFVs that have sold dollar bonds this year include Tianjin Binhai New Area Construction & Investment Group Co., Anhui Transportation Holding Group Co. and Guangzhou Communication Investment Group Co. Spreads on all those bonds have widened to above where they were priced, Bloomberg-compiled prices show.

Diversification of funding sources is another incentive for LGFVs to sell offshore bonds, Fitch Ratings’ Mao said. “Right now, the debt swap program is making it easier for some LGFVs to roll over debt,” he said. “But it’s uncertain whether the program will be in place in the future.”

— With assistance by Lianting Tu, and Judy Chen

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