(Bloomberg) -- A local government financing vehicle in China’s Shandong province reached an agreement with creditors to partially repay and extend the payment deadline for nearly all of its 479 million yuan ($66.8 million) non-bond debts, highlighting the sector’s liquidity challenges despite government support. 

Weifang Binhai Investment Development Co., which raises off-balance-sheet debt financing for the province’s infrastructure projects, hadn’t made payments as of Dec. 31, 2023, past the original deadline, according to the LGFV’s filing this month that was posted on Shanghai Stock Exchange’s private disclosure forum but seen by Bloomberg. 

The LGFV revealed its extension agreement in another filing that was posted Jan. 23 in the stock exchange’s private forum and seen by Bloomberg. The parties still have yet to agree on how to treat 2.3 million yuan of the total, according to the Jan. 23 filing. Its creditors include China Minsheng Banking Corp.

LGFVs’ massive off-balance-sheet debts have emerged as a pressing issue for Beijing, which is keen on restoring investors’ confidence in the struggling economy. While they’re considered by many investors as safer instruments given that LGFVs are state-backed, further signs of repayment troubles may erode their confidence in the sector. 

To alleviate the long-standing local debt problem, China’s central government has introduced fresh measures in recent months, including a 1 trillion yuan refinancing bond program that essentially allows LGFVs to swap debts for ones with lower interests. 

“The ongoing default of bank loans and commercial papers showed that the liquidity condition of some weak LGFVs remained strained despite the rollout of debt-swap program and the overall improving funding conditions of the sector,” said Zerlina Zeng, an analyst at CreditSights Singapore LLC.

An official at Weifang Binhai, who is in charge of bond-related information disclosure, didn’t immediately comment when reached by Bloomberg.   

Another LGFV in China’s Shaanxi province, Xi’an Qujiang Meipi Lake Investment and Construction Co., also failed to pay as of Dec. 26 on two overdue payments, totaling 91.7 million yuan, according to an announcement by ratings agency CSCI Pengyuan earlier this month. The LGFV paid three days after the CSCI announcement, according to a company filing. 

In a news briefing earlier this week, People’s Bank of China Governor Pan Gongsheng vowed to provide financial support for local government debt.

The government’s measures have fueled optimism in the LGFV bond market and pushed their onshore bonds’ spreads to record-low levels. But LGFVs still face 4.65 trillion yuan worth of bonds coming due this year, according to Bloomberg-compiled data.  

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