ASIA: New Opportunities for Chinese LGFVs Amid 'Anti-Epidemic Bond' Issuance.

As published on fitchratings.com, Friday 17 April, 2020.

Fitch Ratings-Hong Kong-17 April 2020: The coronavirus pandemic has spawned so called onshore 'anti-epidemic bond' issuance by Chinese local government financing vehicles (LGFV) to raise funding for their extra public-welfare duties, as local and regional governments are likely to boost infrastructure projects after the pandemic to restore economic growth, says Fitch Ratings.

The unprecedented pandemic and related city lockdowns, notably in Wuhan, where the lockdown started on 23 January 2020 and was waived only on 8 April 2020, have challenged the operation of LGFVs by hindering project progress and completion and preventing the start of new contracted projects. This has increased maintenance costs and delayed cash flow. The majority of LGFVs with public-welfare duties rely on government repayments and reimbursements to repay debt. Project progress is a key determinant of the timeliness and amount of compensation to be received from the government and delays in project execution could cause liquidity tension. The issuance of bonds, which we expect to be backed by speedy regulatory approval, should relieve funding pressure for LGFVs and help them recover from the business disruption caused by the pandemic.

LGFVs with leading positions in their respective regions, those located in severely affected and strategically important cities, as well as those with a heavy policy role, especially if related to post-epidemic reconstruction, social welfare or public infrastructure, particularly in healthcare, are likely to benefit from extra government support. Extraordinary support may include grants and subsidies, special re-loans, prompt financing approval, interest rate concession and debt rollover. The sponsoring government is also likely to mediate with financial institutions to ensure such preferential treatment.

Such extraordinary support measures would mitigate risks stemming from pandemic-related challenges to LGFV's Standalone Credit Profiles. LGFVs that pursue important policy roles and are rescued from major distress caused by the coronavirus-related economic crisis by their government sponsors would demonstrate the robustness of the support framework and create an incentive for other LGFVs that were shifting towards a more diversified and commercialised business model to refocus on public missions, while achieving a balance with state-owned enterprise reform at the same time. This may lead LGFVs to abandon less cost effective projects and, in turn, improve their leverage profiles, even those with resilient financial profiles that can withstand the disruption.

The pandemic, although challenging, has also presented opportunities to improve LGFVs relationships with their sponsoring governments and test government support expectations. Fitch will observe if the relaxed conditions for domestic bond issuances in the onshore market will be extended to foreign bond issuances in the offshore market, where extra regulatory approval is likely to be required.