The Influencing Factors And Quantitative Research For Probability Of Default Of Chinese Urban Construction Investment Bonds

Since the tax reform in 1994, along with the accelerated urbanization process in China, the gap between local government fiscal revenue and expenditure has expanded greatly. In order to meet the needs of city infrastructure and bypass legal regulations, local government financing platform companies came into being. The bonds they issued, named urban construction investment bonds, play an increasingly significant role in the process of local government financing. Especially in 2009 and 2012, the urban construction investment bonds ushered in two leaps and bounds. Their size surged, and the urban construction investment bonds have become a "hero" in bonds market. At the same time, with the process of their size expands, the overall credit quality of urban construction investment bonds sank. Several credit events which occurred in recent years have received wide attention. To solve this problem, based on the characteristics of urban construction investment bonds, this paper analyses the reasons of the probability of default of urban construction investment bonds, and builds computational model according to multivariate Logistic regression to calculate the probability of default and the factors affecting it.Based on domestic and foreign researches of the default probability of municipal bonds and urban construction investment bonds, this paper carries out on the definition of urban construction investment bonds and their general debt characteristics and unique features, and then this paper analyses the factors that affect their default probability. This paper argues that according to general debt characteristics, the main factors affecting their default probability include financial strength of the company’s bonds, the company’s industry position, its corporate governance, and the measures to increase credit level. According to unique features, the main factors are the financial strengths of local governments and regional economic development. Therefore, this paper selects 17 financial strength indicators on behalf of a company, three indicators of the local government’s financial strength, and five indicators of the level of regional economic development. Then, this paper utilizes a multi-factor ordered Logistic regression model to analyses factors affecting the default probability, with time series data from 2008 to 2012 of 35 platform companies and cross-section data in the year 2013 of 110 provincial-level platform companies in China. In the next step, this paper uses data of historical credit rating transforms with Monte Carlo method to estimate the distribution of credit rating transforms to calculate the default probability of different credit ratings and the default probability of urban construction investment bonds.The empirical results show that the factors significantly affect default rate of the urban construction investment bonds are:assets in general debt, equity, asset-liability ratio and equity ratio; heterogeneity risk factor are gross domestic product GDP, public budget, and tax revenues; using test samples in the data show that the result based on the model of this paper, is in line with the actual credit rating, proves the validity of the model. Therefore, it is believed that whether the default will happen or not primarily depends on the size of its capital structure and the size and level of local government financing platform companies, and local government’s financial strength of regional economy, and this is unique feature of Chinese urban construction investment bonds as its distinctive government background.