Local government financing vehicle restructuring, implicit government guarantees and debt financing costs: Evidence from the Chinese municipal corporate bond market

Abstract

We contend that implicit government guarantees are included in municipal corporate bonds (also known as “Chengtou” bonds) issued by restructured local government financing vehicles (LGFVs) to address implicit government debt concerns, which implies lower debt financing costs. Using a sample of publicly issued Chengtou bonds between 2017 and 2021, we demonstrate that bond-specific risk is substantially reduced after LGFV restructuring. Similarly, the yield spreads on Chengtou bonds are considerably smaller than those on bonds issued by unrestructured LGFVs. Our findings generally imply that LGFV restructuring can lower debt financing costs through implicit government guarantees. Moreover, LGFV restructuring has had a credit effect, an operation effect and a willingness effect on reducing debt financing costs. Furthermore, the impact of restructuring is more pronounced among enterprises that are smaller in scale and less profitable and in regions with poorer economies. Additional investigations into the mechanism reveal that restructuring into a group enterprise can lower debt financing costs and reduce the reliance on implicit government guarantees.