LGFV makes overdue payments after rare bond default

A State-owned asset management firm in Northwest China’s Xinjiang Uyghur Autonomous Region has made payments on its bonds after missing the deadline earlier, in what was a very rare bond default by a Chinese local government financing vehicle (LGFV).

Concerns about debt levels in China, particularly local borrowing, are on the rise as the economy cools and authorities in Beijing turn once again to stimulus spending and easier credit. Several big local rail projects have been revealed only in the past few days.

Xinjiang Production and Construction Corps (XPCC) Sixth Division State-Owned Asset Management Co said, in a filing on the website of the Shanghai Clearing House, that it made the overdue principal and interest payments on Wednesday morning.

The company had said in an earlier statement that it was in “material default” after failing to raise sufficient funds in time.

The company missed principal and interest payments totaling 521.8 million yuan ($75.53 million) due Monday on a 5.89 percent 270-day short-term commercial paper issue.

While not China’s first such default – an LGFV in East China’s Anhui Province missed a coupon payment on a bond in 2009 – investors say the impact of XPCC Sixth Division’s default has shaken markets this week.

“It adds a lot of spread to LGFV bonds from Xinjiang. It’s very bad for refinancing,” said a trader in Shanghai, referring to the premium demanded by investors for buying riskier bonds.

“Traders are losing trust in LGFV bonds,” said a trader at a local asset management firm.