Once upon a time, China’s institutional investors thought that “urban investment bonds” were the safest way to back government infrastructure projects- projects financed through local government funding platforms (LGFPs). Now, however, according to Caixin Magazine, investors are beginning to get skittish about the bonds as the LGFPs are showing signs of default.
“There are signs of contract breaches for urban investment bonds,” said a debt market source. “While this hasn’t triggered a sell-off, the willingness to purchase new urban investment debt has fallen. Everyone is watching to see whether the situation will deteriorate further,” the source said.
Part of the problem is the urban investment bonds are hard to track because of the Chinese bond market’s lack of regulation, but investors may be holding a few hundred billion yuan of them. They were reassured that they would get paid, and LGFPs have been paying, even if it means restructuring their debt.
“The way to mitigate the problem is to ‘move out,’ (that is) to sign a three-party agreement with the government and China Banking Regulatory Commission that transforms special platform loans into general corporate loans” with more lenient terms, said a bank source.
LGFPs have also been leaning on big state banks to give them them money to make interest payments to bondholders.
But then what about principle? The first major wave of repayments is due at the end of this year (mark your calendars).