The reorganisation of China's monolithic Ministry of Railways (MOR) entails restructuring its mountain of debt, but while Beijing has no plan for how to deal with it as yet, bondholders aren't breaking a sweat.
In countries with stronger enforcement of contract law, the restructuring of a giant, troubled public entity with 2.6 trillion yuan ($418.13 billion) worth of outstanding debt would begin with a conversation about how the bond covenants would be handled, and that conversation would largely determine the outcome of the restructuring plan.
But while Beijing continues to liberalise China's bond markets, contractual considerations still take a back seat to policy. All officials will say about outstanding MOR debt is that they'll get around to it.
"This reform deals first with separating the administrative and commercial. Resolving this newly established enterprise's debt will be resolved in the next step," said Wang Feng, deputy director of the State Commission for Public Sector Reform, on the sidelines of China's parliamentary assembly on Monday.
That hasn't bothered bondholders; MOR bonds continue to trade at yields comparable to China State Grid, another deeply indebted quasi-sovereign issuer which is not being restructured. All MOR bonds are held by domestic investors.
The MOR had a reputation for sloppiness, with its reputation hitting an all-time low after a high-speed train wreck in Wenzhou in 2011. It also had a reputation for corruption, and its former chief Liu Zhijun was sacked in 2012.
Unfortunately for Chinese taxpayers, however, the rail ministry was still allowed to issue bonds. It did so regularly, because as a quasi-sovereign issuer with a triple-A rating, it could tap fixed-income markets cheaply regardless of reputation.
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Derived yields for MOR 10-year bonds are currently at 5.14 percent, 158 basis points over China's sovereign benchmark rate but far cheaper than the 6.9 percent yield for a comparable 10-year issue by a Tianjin local government investment vehicle.
The Ministry still has 922 billion yuan worth of construction bonds outstanding, 106 billion yuan in medium-term notes and 9 billion yuan in corporate bonds, plus smaller amounts of short-term debt.
Analysts told Reuters that they think Beijing might handle the restructuring of the debt through a special bond issue by the Ministry of Finance, to be injected into whatever the MOR ends up being.
But as far as MOR's bondholders are concerned, these are petty details. What is important to them is that the ratings and the risk profile stays unchanged, and on that count analysts say they have nothing to worry about.
China has never had a corporate bond default, and since the MOR's remit is delivering a key strategic infrastructure upgrade, not returning a profit, Beijing is not looking to signal default risk, which would only drive up borrowing costs.
"This is a top down order for them to split so it's not like the government will let it go, or that it increases the chance of a corporate default," said Wu Qiong, fixed income analyst with BOCI Securities.
And since so many of the bondholders are themselves owned by the state, specifically banks, insurance companies, and other major government enterprises, a default would simply shift bad debt from one part of the state-controlled economic system to another.
"Railway development is still a priority for the government and so the state support is likely to remain for fund raising," said Wu.
Even as Beijing contemplates how best to devolve its functions, the ministry continues to lay track, and it has been approved to issue 150 billion yuan worth of new bonds in 2013.
"The next time it's time to issue bonds, the ministry might not exist," pointed out a bond underwriter at an investment bank in Beijing, who spoke on condition of anonymity because he is not authorised to speak to the press.
"The State Council needs to issue a statement to explain the specifics. But yields won't be affected." ($1 = 6.2181 Chinese yuan)
(Additional reporting by David Lin and Michael Martina; Writing by Pete Sweeney; Editing by Kim Coghill)