Infrastructure debt funds have made a successful entrance into global institutional investment fundraising during the past 18 months with several vehicles closing after collecting billions of dollars of commitments.
Now comes the challenge of deploying that capital.
According to a report by Bloomberg News, these funds may find Chinese municipal debt offerings a tempting item on the global menu of fixed-income investments. This is because ratings agencies are predicting many Chinese municipalities will be in dire need of financing due to changes in policies governing their options to raise funds, which could lead them to follow the example of Beijing Infrastructure Investment Co. The city’s metro transportation operator raised $1.3 billion in 2014 via a global bond offerings — the first Chinese metro operator to do so — including a $1 billion offering in November.
Analysts predict more local government financing vehicles will come to market as “dollar bonds” similar to Beijing Infrastructure’s recent offerings because a longstanding policy that supported these financing vehicles’ local fundraising was called into question by the State Council in October. Municipal governments are increasingly coming under scrutiny regarding the amount of debt they are able take on and comfortably service.
A recent spread between onshore and offshore bond offerings was 5.06 and 3.75, respectively, or 1.31 percent, making the offshore route more affordable for these municipalities, Bloomberg notes. Investors have to consider that these municipal debt offerings often do not have a guarantee of repayment but they are backed by the Chinese government.
With their ability to raise capital locally clipped, these municipalities are expected to increasingly look for overseas investors as cheaper sources of financing that can replace the local bond buyers. China’s local government financing vehicles are estimated to be responsible for some 40 percent of local government debt, implying there should be a lot of offerings in the market.
Bloomberg notes there are 40 cities in China with approval to construct a metro system by 2020:
“By that time, the central government targets 6,000 kilometers (3,728 miles) of metro lines will be built, which S&P estimates will require as much as 2.5 trillion yuan ($401.4 billion).”
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Drew Campbell is senior editor of Institutional Investing in Infrastructure.
