Since the second half of 2024, urban investment (UrbInv) foreign bonds have been facing maturity one after another, and debt replacement is becoming an option.

Reporters from China Business News have learned that recently, some provincial urban investment companies are considering replacing foreign bonds with domestic bonds.

The background is that the current interest rates for domestic bonds issued by urban investment companies continue to decline, with a general issuance rate of around 2.5%, while the issuance rate for foreign bonds is generally above 5.5%, and with other issuance costs, it can even reach 8%-10%.

"Replacing high-interest foreign bonds with low-interest domestic bonds will help reduce the financing costs of urban investment companies, optimize debt structure, and further promote the resolution of local debt," said an industry insider to the reporter.

Replacing high-interest debt

At the end of 2023, regulatory control and the scarcity of domestic urban investment bond assets led to a surge in demand for foreign bonds. Although the issuance cost of foreign bonds is relatively high, the "heavy gold" blood-making was still popular for a while.

Advertisement

Recently, there have been reports in the industry that some local regulators have allowed the issuance of domestic bonds to repay existing foreign debt, but the specific use is not clear whether it is to borrow new to repay old or to repay interest-bearing debt.

At the same time, an urban investment company in a southwestern province issued a "Notice on Public Selection of Service Brokers for Corporate Bonds and US Dollar Bonds". The notice shows that the company plans to issue an additional 720 million yuan in bonds to replace 100 million US dollars in foreign debt. The company has issued a total of two foreign bonds, one of which has expired at the end of 2023. The remaining one will expire on October 8, 2024, with an issuance amount of 100 million US dollars. If the domestic bond issuance is successful, it will be specifically replaced.

The industry believes that if there are successful cases of urban investment domestic bond replacement of foreign bonds, it will be of great significance for the continuation of debt resolution work. However, the above notice was only retained for a few days, and the company withdrew the relevant content without announcing the reason for the withdrawal.

The reporter noticed that since 2024, the issuance coupon rate of urban investment domestic bonds has continued to decline, even falling below 2.5%, and the average issuance rate of foreign bonds is above 5.5%, and the interest rate difference is the main driving force for domestic replacement of foreign bonds."Our main task this year is to reduce the issuance costs of financing," said the head of the financing department of a county-level urban investment company in Jiangsu during an interview, also revealing the current financing situation. In addition to reducing financing costs, the head of the financing department believes that the difference in debt structure also drives platform companies to hope to replace domestic bonds with foreign bonds. "Since the beginning of this year, the issuance term of urban investment domestic bonds has been significantly extended, especially for 3 to 5 year maturities, but the issuance term of foreign bonds generally does not exceed 3 years. If domestic bonds can be replaced with foreign bonds, it will be beneficial to optimize the debt maturity structure of urban investment platforms."

According to Wind statistics, as of the end of July 2024, the outstanding amount of Chinese foreign bonds was 4,742, with a balance of $1,284.258 billion. Among them, the outstanding amount of Chinese urban investment bonds was 793, with a balance of $104.908 billion, approximately 734.356 billion yuan.

In addition, according to Huaxiang Securities statistics, as of August 12, 2024, the outstanding amount of urban investment foreign bonds reached 1,025, with a total amount of about 930.7 billion yuan, of which US dollar bonds accounted for nearly 70%, and Dim Sum bonds accounted for about 30%.

Jiang Dan, an analyst at Huaxiang Securities, said that in the current urban investment outstanding foreign bonds, the proportion and coupon rate of US dollar bonds are still relatively high. In terms of maturity, the existing urban investment foreign bonds are basically due before June 2027. Looking at the maturity rhythm, urban investment foreign bonds will usher in a maturity peak, and the amount due within the next year will exceed 300 billion yuan.

Foreign bond issuance has not slowed down

As for whether urban investment domestic bonds should be used to replace foreign bonds at present, Jiang Dan believes that this mainly depends on which is more, the interest cost saved by replacement or the exchange loss, and whether the issuer wants to retain the financing channel of foreign bonds. Since this year, the gap between the coupon rate of urban investment domestic bond issuance and foreign issuance has exceeded 300 basis points. This gives urban investment platforms the motivation to save interest expenses by issuing domestic bonds, but it does not rule out that some issuers may want to retain the financing channel of foreign bonds, fearing that strict approval in the future will make it difficult to issue new ones again.

At present, some urban investment companies still have some "practical" confusions, such as whether they can add financing in the proposed declaration place, whether it involves the entry and exit of funds, etc. In this regard, the reporter also learned that according to the current regulatory framework of Chinese foreign bonds, Chinese enterprises going abroad to issue bonds are subject to dual supervision from both domestic and foreign, in addition to needing to apply for foreign debt registration and record filing with the National Development and Reform Commission, and apply for fund outflow or return with the State Administration of Foreign Exchange, they also need to apply for listing with the bond listing exchange.

The reporter noticed that although the demand for urban investment domestic bond replacement of foreign bonds has appeared, the issuance of urban investment foreign bonds has not "slowed down" since this year. Zhongchengxin data shows that from January to July 2024, the issuance scale of urban investment foreign bonds was $27.457 billion, a year-on-year increase of 70.92%.

Wang Xiaomeng, a researcher at the Zhongchengxin International Research Institute, analyzed that there are mainly three factors: First, the validity period of urban investment foreign bond approval is one year, and urban investment enterprises that obtained the approval in 2023 need to issue it within this year, and some urban investment enterprises have delayed, leading to concentrated issuance. Second, the pressure of urban investment maturity is relatively large, and the demand for new borrowing to repay old borrowing of urban investment foreign bonds has increased. From January to July this year, the proportion of the issuance scale of urban investment foreign bonds used for refinancing increased by 5.63 percentage points compared to 2023, and some urban investment enterprises choose to bear high financing costs to roll over foreign bonds to avoid the contraction of foreign financing channels. Third, under the restriction of domestic financing, some urban investment enterprises turn to foreign market financing. From January to July this year, more than 70% of the first-time issuance of foreign bonds by urban investment enterprises were district and county-level platforms, and more than half of the domestic main body ratings were AA+ and AA.

In addition, Wang Xiaomeng analyzed that with the continuous tightening of foreign bond regulatory policies, the difficulty of approving the review of urban investment enterprise foreign debt approval has increased, especially the foreign debt of district and county-level urban investment enterprises may be fully tightened or even suspended. Some urban investment enterprises that obtained the approval before accelerated the issuance within the validity period of the approval, which to some extent led to an increase in the issuance scale.It is worth noting that due to the relatively simple procedures for overseas debt issuance of 364 days or less, in the second half of 2023, as the financing channels for urban investment companies continue to contract within the country, the scale of "364-day overseas debt" issued by these companies has increased significantly, and the costs are relatively high. In January of this year, regulatory authorities, in order to address the issue of some enterprises taking advantage of policy loopholes to incur large-scale high-cost debt, restricted the issuance of "364-day overseas debt" in some provinces.