September 12, 2018 / 9:09 AM / 7 days ago

Global rating agencies downgrade China LGFVs, government support expected to weaken

SHANGHAI (Reuters) - Two major global rating agencies downgraded issuers linked to Chinese regional and local governments on Wednesday, drawing attention to credit risks as Beijing continues its lengthy crackdown on systemic financial risks.

S&P Global Ratings said it had cut by one notch the long-term issuer credit ratings of seven Chinese local government financing vehicles (LGFVs) from Chongqing and Tianjin municipalities, and Jiangsu and Hunan provinces, that had issued bonds offshore.

Also on Wednesday, Moody’s Investors Service said it had downgraded five Chinese non-financial corporate and infrastructure issuers owned by regional and local governments in Jiangsu, Tianjin, Hunan, and Hubei province.

“We believe the likelihood of local Chinese governments providing their highest level of extraordinary support to LGFVs could weaken over time, in response to central government oversight,” S&P said in a statement, referring to the multi-year campaign to reduce financial risks and a mountain of debt.

The company said the downgrades “reflect the gradual weakening of the (financing vehicles’) roles and links with their local-government parents.”

China has vowed to keep debt levels under control even as it rolls out new economic stimulus measures to offset the impact of trade frictions with the United States.

China will strengthen its management of local government debt and control debt risks, Xinhua News Agency quoted the finance minister as saying late last month.

Both S&P and Moody’s downgraded Tianjin Binhai New Area Construction & Investment Group Co Ltd. S&P lowered its long-term issuer rating for the company to BBB from BBB+, and Moody’s lowered its rating to Baa2 from Baa1.

S&P also lowered its outlook for Zhenjiang Transportation Industry Group Co Ltd to negative, while maintaining stable outlooks on the other six LGFVs.

Both agencies downgraded the ratings on senior unsecured bonds issued or guaranteed by the downgraded LGFVs.

Richard Langberg, senior director and analytical manager, infrastructure ratings at S&P Global Ratings, said the ratings review and downgrade follows a spike in financing costs for the issuers in the first half of 2018 amid Beijing’s campaign targeting excessive financial risks.

“We do think ... there’s a transition underway that is moving these LGFVs away from greater support or greater relationship with their parents over an extended period of time,” Langsberg said.

“What we’re signaling with this downgrade is that transition is ongoing, and it’s being felt first where the rating has historically been set up such that it’s the same as the parent,” he said.

China’s LGFVs have been mostly shielded from a wave of defaults this year that has rocked the country’s corporate bond market.

But a rare technical default by a Xinjiang-based LGFV in August highlighted risks to investors in firms that have historically been seen as having implicit government backing.

Total outstanding local government debt was 16.63 trillion yuan ($2.42 trillion) by the end of May, according to the latest figures from the Ministry of Finance.

Reporting by Andrew Galbraith; Editing by Kim Coghill

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