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Fitch Ratings-Shanghai-17 April 2025: The Shanghai Stock Exchange is likely to further tighten bond issuance related to funding new projects by local-government financing vehicles (LGFVs) with weak interest coverage and significant fiscal exposure as part of broader efforts to control public sector debt growth, says Fitch Ratings. Nevertheless, we expect the policy environment to continue facilitating market access for LGFVs to prevent systemic risk from defaults, with the new guidelines unlikely to hinder the refinancing of maturing bonds or access to bank borrowings.

The exchange revised its review standards for onshore corporate bond issuance in late March 2025. The updates introduced new disclosure requirements on EBITDA interest coverage, debt structure volatility, high trading income, lack of core revenue sources and corporate governance. These serve as additions to existing guidelines on LGFVs’ investment-related bond issuances. Past measures included the removal of hidden debt, reclassification as non-LGFVs and limits on fiscal exposure, as reflected in LGFVs’ balance sheets and income statements through elements such as government subsidies and receivables.

A key new requirement is maintaining a minimum of 1x EBITDA interest coverage, which we believe will prevent the majority of LGFVs from issuing investment-related onshore bonds over the next 12-18 months. Affected LGFVs are those with persistently weak Standalone Credit Profiles (SCPs), characterized by high leverage, low interest coverage and dependence on government support. Over 95% of Fitch-rated LGFVs have SCPs in the ‘b’ category, while more than 70% reported Fitch-adjusted EBITDA cash interest coverage of below 1x in 2023. The ratio will be lower if only expensed interest is included in the calculation.

We expect any improvement in coverage from debt substitution – removing hidden debt from balance sheets – and lower cost of debt to be gradual, marginal and uneven, as hidden debt accounts for less than a quarter of total LGFV debt and the substitution programmed spans four years until 2028.