A LOCAL government financing vehicle’s plan for early bond redemption is raising onshore investor concern that more firms will follow suit, creating the potential for losses if notes are bought back at below-market prices.

    Hebei Xuanhua Beishan Industrial Park Investment Co., which is based in the northern province of Hebei, plans to hold a meeting with bondholders to discuss early repayment of the 600 million yuan (US$93 million) in notes issued in June 2014. The Xuanhua government plans to pay principal with proceeds of a separate bond sale.

    Premier Li Keqiang’s program for cleaning up local government debt, which allows regional authorities to directly issue municipal notes to replace expensive corporate securities, has helped boost their capital. Their financing arms, or LGFVs, have strong motivation to redeem old notes early after their liquidity turned ample, said Hua Chuang Securities Co. in a report last week.

    “If the issuers redeem the bonds at face value, investors who bought the bonds in the secondary market would suffer big losses,” analysts led by Qu Qing at Hua Chuang Securities wrote in the report. “If they redeem the bonds at market value, investors would not suffer losses.”

    Xuanhua Beishan’s 2021 bond traded at 109 yuan Thursday, compared with their 100 yuan face value, according to Chinabond data. Xuanhua Beishan Industrial Park sold the bonds in June 2014 with a coupon of 8.6 percent. (SD-Agencies)