Q209
Can special bonds be repaid early?
Local government special bonds are an important starting point for the implementation of proactive fiscal policies, and are one of the most direct and effective policy tools for the government to stimulate investment. The repayment methods usually include lump sum principal repayment at maturity, repayment of principal in installments, and early repayment of principal of bonds with rights. According to the statistics of Hotron Zhisheng (attached table), from 2018 to 2023, a lump sum repayment of principal at maturity is the most widely used method. In recent years, some local governments have begun to explore a variety of principal repayment methods, including early repayment, in order to optimize their debt structure and save interest expenses. In August last year, the Beijing Municipal Bureau of Finance took the lead in exploring the early repayment of some local government special bonds.
1. Can special bonds be repaid in advance?
Special bonds can be repaid early. On November 4, 2020, the Ministry of Finance issued the "Opinions on Further Improving the Issuance of Local Government Bonds", which clearly pointed out that local finance departments should comprehensively consider multiple factors such as bond yield curve, project term, financing cost, distribution of maturing debt and investor demand in the process of bond issuance, and scientifically design the bond maturity. The Opinions clearly allow local governments to adopt a variety of principal repayment methods, including principal repayment at maturity, early principal repayment and annual principal repayment, according to the actual situation, providing local governments with greater flexibility and autonomy.
According to the Administrative Measures for the Issuance of Local Government Bonds, since 2020, local governments have been expressly authorized to adopt various principal repayment methods such as early repayment and installment repayment. This provision provides local governments with more options in debt management, allowing them to optimize debt structure and financing costs according to their own fiscal and market conditions.
On March 9, 2023, the Finance and Economic Committee of the 14th National People's Congress (NPC) further emphasized the importance of accounting and management of revenue and expenditure of special bond repayment funds when reviewing the Implementation of the 2022 Central and Local Budgets and the Draft of the 2023 Central and Local Budgets. The committee clearly proposed to explore the establishment of a mechanism for the early repayment of the principal of special bonds, and pointed out the direction of future debt management.
To sum up, according to the relevant policies and opinions of the Ministry of Finance and the Financial and Economic Committee of the National People's Congress, local governments can repay the principal of special bonds in advance, and these policies provide operational basis and policy guidance for local governments. The early repayment of special government bonds in Beijing is a successful example.
2. Is early repayment a breach of contract?
When discussing the issue of whether the prepayment of special bonds is a breach of contract, it is important to understand the relevant legal framework for bond issuance and trading. As a debt instrument of local governments, the issuance and repayment of special bonds are subject to strict legal provisions. Early repayment usually needs to be expressly allowed in the deed at the time of bond issuance, or with the consent of creditors. This means that as long as the terms of the bond covenant regarding early repayment are followed, or the creditor's consent is obtained, early repayment is not a breach of the covenant.
Under the general rules of the Chinese bond market, bond terms often include provisions on early redemption, which detail the conditions under which the bond issuer can prepay the bonds, as well as the associated prices and procedures. For example, some weighted bonds have a specific maturity beyond which the bond issuer has the right to redeem the bond in advance and may be required to pay a redemption premium.
In the case of the early repayment of special government bonds in Beijing, the Beijing Municipal Bureau of Finance adopted a market-based competitive bidding method to determine the early repayment price, making the process transparent and fair. In this way, creditors have the opportunity to participate in competitive bidding on a voluntary basis to decide whether or not to accept the terms of early repayment.
III. Early Repayment Procedures (Taking Beijing as an Example)
Beijing's pilot project for early repayment of special government bonds is a typical example of how local governments can optimize their debt structure and save interest expenses through market-based mechanisms within the legal framework. The specific operating procedures involve multiple steps, each of which strictly follows the relevant policies and regulations, ensuring the legality and efficiency of the entire process.
According to the Notice on Early Repayment of Certain Beijing Municipal Government Bonds issued by the Beijing Municipal Bureau of Finance, the process of early repayment of special bonds is as follows:
Note: Beijing Hongchuang Zhisheng is compiled according to the Notice of Beijing Municipal Finance Bureau on Early Repayment of Part of Beijing Municipal Government Bonds
In this way, Beijing successfully completed the early repayment operation at a cost of 2.2815 million yuan (excluding principal), which saved a lot of interest costs compared with the original interest expense of 22 million yuan before maturity. The interest rate of special bonds of the same maturity has dropped from 3.42% in February 2020 to 2.98% in June 2023, saving more than 70% of interest expenses.
IV. Conclusions
It is the policy for local governments to repay special bonds in advance. In the exploration and practice of early repayment of special government bonds, Beijing has clarified the types and methods of early repayment, then determined the relevant matters of bidding and bidding, and finally carried out the freezing of creditor's rights and the liquidation of funds. The implementation of the entire prepayment process relies on clear legal provisions and standardized operating procedures, which not only proves the feasibility of early repayment of special bonds, but also demonstrates the flexibility and innovative spirit of local governments in debt management. This approach will help optimize the debt structure, reduce fiscal costs, and improve the efficiency of the use of fiscal funds. At the same time, it also provides lessons for other local governments to learn from, showing how to optimize fiscal costs and debt structure through effective market mechanisms to promote the healthy development of local economies while ensuring debt sustainability.
2018-2023 special bond repayment method table
[1] Proactive fiscal policy to enhance efficiency and promote the high-quality economic and social development of the capital -- the implementation of the 2023 budget and the 2024 budget arrangement of Beijing
[2] Opinions on Further Improving the Issuance of Local Government Bonds
[3] Administrative Measures for the Issuance of Local Government Bonds
[4] Implementation of the 2022 Central and Local Budgets and the Draft of the 2023 Central and Local Budgets