LGFV might adopt opaque credit enhancement structures to raise funds in the offshore bond market. Questions appear as the structure might trigger the issuers into trouble. Recently, LGFV has dominated offshore bond supply this year. This comprises around 71% of the whole total of the US dollar bonds issued by Chinese corporations. CreditSights reported this issue last month. The company’s definition itself is a bit blurry, but they commonly appear as off-budget funding for local governments. The business covers both public investment or services. Some also have reached into commercial profit operations.
This year, the source of opaque offshore deals from the company are from weaker lower-tier sites. Most LGFVs do not have a rate and their bond price tends to be like investment-grade paper. In addition, the international investors find that the US dollar and euro bonds from LGFvs are less interesting. So, the buyers are commonly the bookrunners. They are mainly offshore branches of Chinese financial institutions.
Therefore, there would be two opposing points of view in acquiring LGFV bonds. In the primary market for instance, the bonds could be a loss-making proposition. However, on the other hand, bookrunners might find it interesting as it triggers cross-selling opportunities to local governments. But the situation is, although lower-quality LGFVs have more deals, bookrunners are still conservative. They want stronger credit enhancement before buying.
In a report, Moody argues that almost 50% of the high-yield unrated LGFVs holded a standby letter of credit. This is 35% compared to last year. Commonly, banks provide SBLC in the form of a line of credit. So the banks would purchase the bonds if the issuers miss this.