Metro deal signals China's required funding diversity

 The overseas bond market could bridge a $320bn to $400bn gap in China’s subway expansion financing, according to a recent sector review by Standard & Poor’s.    

In response to a financing completed in March by the Beijing government's wholly-owned metro operator – Beijing Infrastructure Investment (BII) – a Standard & Poor's review has deemed the overseas bond market well suited to improving the credit profile of BII, the first Chinese metro operator to partner with private investors for an expansion project. It also suggested the financing could set a trend across the Chinese urban landscape.

The bond issue was sought by BII as a means to broaden its investor base at a time when the government is seeking alternative sources of financing to cope with high public indebtedness and the colossal amount of works to be undertaken. “Overseas funding has helped BII to diversify its investor base and reduce financing costs since US dollar funds have lower costs than domestic funds”, noted the review.

BII’s first issuance of $320 million in senior unsecured notes on the Hong Kong Exchange in March was oversubscribed, reining in an extra $160 million from “56 high quality accounts”, said  David Yim, head of North Asia, Debt Capital Markets at Royal Bank of Scotland, the lead underwriter and rating advisor of the offering. The bonds received strong interest from Asian investors, 80 percent of them Hong Kong based and 11 percent Singapore based. The bond was heavily subscribed by banks (50 percent) and fund managers (45 percent), private banks and insurers only representing respectively 3 percent and 2 percent of the accounts.

The metro operator, drawing on the success of the operation, which achieved a coupon rate that ranked second-tightest among those issued offshore by state-owned enterprises so far this year, is now following up with a $2 billion medium-term note programme, the first phase of which is due to start this Friday with the issuance of a further $193 million in RMB-denominated bonds.

The company received an A+ rating from both S&P and Fitch, which the agencies largely attributed to the strong fiscal support provided by the Chinese government – itself a highly creditworthy counterparty – and the confidence they have in its long-term involvement in the company.

The unsustainability of public funding as the sole source of funding for transport projects is becoming apparent throughout the country with local governments continuing to heavily subsidise railway assets through infrastructure investment companies while having to cope with the challenge of their expansion – an imperative made all the more urgent by severe CO2 pollution and worsening road congestion. The S&P review announced that the government was targeting 6,000 kilometers of metro lines by 2020 to cope with “decades of chronic underinvestment”.

The agency forecasts that by 2015 operators will rely on local governments for 30 percent to 40 percent of the capital they need to invest in their networks.