More Rating Actions Are Expected on LGFVs, JPM, ICBCI Say

(Bloomberg) -- Participants in the Asian dollar bond market, including JPMorgan and ICBC Intl, say they are expecting
more rating actions toward China’s LGFVs after S&P downgraded seven firms and Moody’s cut ratings on five.

Both rating firms expect central government support for the sector to reduce over time as China aims to reduce leverage for the financing platforms and cut contingent liabilities on local governments.

While one-notch downgrade within IG space should be manageable, if some eventually lost their IG status, it might
trigger forced selling, leading to more drastic declines in their bond prices, according to Manulife Asset Management.
Below are views from analysts and investors:

Anne Zhang (JPMorgan Private Bank)

“I agree that the LGFVs are likely going to get less government support and I expect more rating actions to come
going forward.”

“The market reaction is muted so far, partly because that a lot of the LGFV bonds are small in issuance size and were most likely anchored by onshore investors during new issue stage.”

Angus To (ICBC International)

China’s onshore deleveraging campaign should continue to clear the contingent liabilities involving existing LGFV debentures.

“We are not surprised to see the rating downgrade of the LGFVs by S&P which bases its rationale on similar ground and more downgrades could be on the cards.”

“We rule out the case of full elimination of LGFVs as some of them are servicing in areas of great public interest. Investors are advised to be selective in picking LGFV names which take strategically important roles, and are interlinked with local government having a sound fiscal position.”

Charles Macgregor (Lucror Analytics)

“The S&P downgrades are significant only so far as the agency is questioning the ability of provincial governments to support LGFVs rather than their willingness, which remains very strong.”

“We view the actions as helpful for investors as hopefully it will bring a more rigid assessment of individual LGFVs and
better pricing for relative risk.”​ 

Jimond Wong (Manulife Asset Management)

“LGFV space is rapidly evolving. On one hand the local governments needs the vehicles to perform important public
functions or provide services, but on the other hand they have pressure to distant themselves from these vehicles to contain fiscal burdens.”

“I think the downgrades reflect a shift from the former to the latter, against the backdrop of weakening fiscal positions of
some local governments.”

2018-09-12 09:06:35.767 GMT

By Carrie Hong and Narae Kim