Bonds That Were Ground Zero for China Debt Woes Now Top Pick
(Bloomberg) -- China’s stimulus measures are seen easing financial stress at the nation’s debt-laden town builders, making them among the top picks for investors this year, a Bloomberg survey showed.
Some 15 out of 20 analysts and portfolio managers recommend adding more bonds of local government funding vehicles to their portfolios in 2019, according to the survey done in recent weeks. After Chinese government bonds, LGFVs are the most sought after by respondents in the survey, followed by convertible notes.
Sentiment on LGFVs, typically owned by local governments to carry out infrastructure projects, is turning more positive as China’s targeted easing measures and fiscal support have cut their funding costs. The yield premium on three-year AA rated LGFV notes over government bonds has dropped to a two-year low of 119 basis points on Tuesday, according to ChinaBond data.
“A slowing economy combined with a trade war means Chinese government will focus more on growth and less on deleveraging," said Ben Sy, head of fixed income, currencies and commodities at JPMorgan Chase & Co.’s private-banking unit in Asia. "This is good for both the LGFV and property sectors as their funding constraints may be eased and hence a lower refinance risk.”
The policy support couldn’t have come at a better time as these local units face a record 1.3 trillion yuan of domestic and offshore bonds due this year, Bloomberg-compiled data show. Rising investor demand pushed new bond sales to a nine-month high in December. S&P Global Ratings, however, warned this month LGFVs may face difficulty in refinancing their offshore debt.
The ratings company had cut its assessment on seven such companies in September on expectations that “local government support” to them could weaken over time.
Yet, investors don’t seem worried, as shown in the falling interest costs for the sector. Lanzhou City Development Investment Co. last week sold a 1 billion yuan 270-day note at a coupon of 3.6 percent. In November, the LGFV issued a similar bond at 3.95 percent.
"LGFV bonds are our top pick among corporate debt, especially the higher rated ones and those offered by platforms in core regions," said Li Yi, fund manager at Morgan Stanley Huaxin Fund Management Co. "The increase in infrastructure investment and issuance of municipal bonds will improve local authorities’ debt repayment ability."
Du Zhenye, a fund manager at Changan Fund Management Co., also said he will continue purchasing LGFV notes in 2019, a strategy that helped his portfolio achieve an annual return of 14.2 percent in 2018, beating 99 percent of its peers, according to Bloomberg-compiled data.
"Some LGFV notes issued years ago were oversold along with corporate bonds last year amid concerns of surging credit risks,” Du said. “I think there are huge money-making opportunities as LGFVs are generally safe and are less likely to default."
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