Editor's note: Investment π is an investor companion column under CITIC Prudential Fund that aims to popularize investment knowledge and share investment experience. The ups and downs of the market are unpredictable, but focusing on the investment experience and long-term returns has always been our original intention. In this issue, we invited the fixed income team to talk about those things on the road to investment.
From August 2023, the central government will allow local governments to issue special refinancing bonds to replace hidden debts to help 12 provinces and regions with high debt repayment pressure, including Tianjin, Guizhou, Yunnan, Shaanxi and Chongqing, manage and reduce local debt risks. Since then, a new round of localized debt has kicked off, and it is still in full swing in various places. This has also promoted a wave of magnificent urban investment bond market since August, the primary and secondary markets of urban investment bonds are trading hot, the coupon rate and market valuation of the issuance have fallen sharply and compressed, and the overall yield level and credit spread have been reduced to a very low level in recent years.
In the second half of last year, refinancing bonds played a major role in the process of debt reduction, but we are also concerned that the current round of debt policy is actually matched with the emergency liquidity financial instrument (SPV) set up by the central bank, which can provide liquidity with lower interest rates and longer maturities to local urban investment companies. But so far, the SPV tool has not actually been implemented in the actual debt reduction action. As the urban investment bonds begin to enter the second half, we can continue to pay attention to the subsequent application of the central bank's SPV tool, and this article briefly reviews its historical evolution, mechanism characteristics and progress.
Historical SPV tools
Historically, there are two types of SPV tools of the central bank, both of which were established in June 2020 and were introduced by the central bank to encourage banks to lend credit to inclusive small and micro enterprises: (1) the inclusive small and micro enterprise loan extension support tool, which purchases small and micro enterprise credit loans held by local corporate banks through SPVs, and uses interest rate swaps to encourage the extension of loans to small and micro enterprises by 1% of the principal amount of the deferred loans as an incentive, and (2) the inclusive small and micro enterprise credit loan support program, through which 40% of the principal amount is used quarterly through SPVs Purchase new inclusive small and micro loans issued by local corporate banks, and increase the proportion of credit loans for small and micro enterprises.
Chart. The use of the SPV tool twice in the history of the central bank
(Source: Central Bank, CITIC Prudential Fund Management)
Possible characteristics of the application of SPV tools in this round of urban investment bonds
Referring to the two historical central bank SPV tools, combined with some policy spirits of this round of urban investment bonds, we believe that there may be the following three main characteristics in the application of SPV tools.
First of all, the participants of the SPV are commercial banks, and the possible model is to encourage commercial banks to extend the loans of local urban investment platforms through SPVs, and set a certain proportion of the extension amount to compensate and incentivize banks, so as to help urban investment platforms extend debt maturity and reduce debt costs, so as to achieve the effect of "exchanging time for space". It should be noted that commercial banks' credit to urban investment platforms is not on the balance sheet, and commercial banks need to bear their own risks, which is different from overseas SPVs.
Second, the requirements for SPV bonds to offset the collateral of urban investment may be reduced. Affected by policies such as Guo Fa No. 19 and China Banking and Insurance Regulatory Commission No. 15, banks face relatively strict regulatory constraints in terms of collateral and matching projects when providing loans to urban investment platforms. The SPV tool can effectively solve the technical limitations of banks when issuing loans, and may mainly rely on local state-owned assets or finance as the main body of credit enhancement, and relax the requirements for the collateral of urban investment platforms.
Third, through the SPV tool, the central bank can better control the effect of liquidity injection. Compared with general refinancing tools, such as refinancing with guaranteed delivery of real estate, due to the high credit risk, banks are not proactive in investment, and the progress of investment is relatively slow. When using the two types of inclusive small and micro SPVs, the central bank requires local corporate banks to clarify the growth target of loan issuance, so as to strengthen the control of the scale and pace of liquidity injection.
Continue to pay attention to the SPV tool in the second half of the debt
Application landing
In general, SPV, as an important supplement and emergency tool for this round of urban investment bonds, will play an important role and significance in further alleviating regional debt pressure, especially the more urgent liquidity pressure and risks faced by local governments in the process of controlling debt. On the one hand, the follow-up implementation of the SPV tool is one of the very important instrument variables for us to further observe the debt risk and liquidity pressure that different provinces and regions are still facing after the first half of last year's bonds, and on the other hand, it is also one of the important factors affecting the investment strategy of urban investment bonds in the future. We will continue to pay close attention to this and share relevant progress with you in a timely manner.
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