Yunnan finance vehicles on credit watch

08:29, July 29, 2011      

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A top Chinese credit ratings agency has put two local government financing vehicles in the southwestern province of Yunnan on credit watch, the first such move since concerns mounted over potential defaults on local government debt.

China Chengxin International, which is 49 percent owned by Moody's, said it was taking the step because certain assets of the related entities - Yunnan Investment Holdings Group (YIHG) and Yunnan Electric Power Investment (YEPI) - were expected to be transferred or restructured.

Putting companies' ratings on watch is very rare in China's fledgling bond market. The step by Chengxin, one of the country's four main ratings agencies, could be the first of many and raises concerns over whether the bond market, as well as banks, will see a wave of defaults by the entities local governments have set up to raise cash to fund infrastructure projects.

Bonds issued by such local government financing vehicles have already fallen in recent weeks over concerns about their ability to repay their debt.

"The move is not surprising as risks in such debt have already been anticipated by the market and fully priced in," said Wu Zezhi, a trader at Orient Securities Co.

"It's possible that more such debt will be put on credit watch, and if you look at the market, many have already slumped as there are no investors buying."

Chengxin did not give details on the expected asset transfers, but IFR, a Thomson Reuters publication, reported earlier this month that YIHG, the biggest fundraising platform for the Yunnan government, was being asked to transfer its core assets to a separate government-linked entity.

The core assets of that company include a stake of more than 54 percent in YEPI as well as other electric power-related assets, IFR reported, adding that they would be transferred to Yunnan Energy Investment Group, a new government-linked entity.

"We will continuously watch the asset transfers related to Yunnan Investment Holdings, the plan and progress of restructuring of Yunnan's provincial electricity assets, as well as measures to guarantee creditors' interests," Chengxin said in its statement.

As a result of putting YIHG on credit watch, Chengxin also put two specific bonds on watch - one issued by YIHG itself and another issued by Yunnan Railway Investment Company. Those bonds currently have AA+ ratings, Chengxin's second-highest investment-grade rating.

Source:China Daily
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