China Huarong uncertainty unnerves debt investors as credit ratings agencies review outlook for distressed-debt manager

State-owned manager of distressed debt missed deadline to report annual results in March
Results delay and potential downgrades are spooking bond holders

Banking & finance

Chad BrayandGeorgina Lee

Published: 8:00pm, 14 Apr 2021

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China Huarong Asset Management Company, one of China’s five national managers of distressed debt, could be on the verge of a major restructuring – and that is spooking debt investors.

Dollar-denominated bonds for Huarong have tumbled sharply in recent weeks after the company warned that it would not report its results on time because of a “relevant transaction,” the details of which have not been disclosed publicly. Its Hong Kong-listed shares have been suspended since April 1.

Concerns about the company’s outlook have arisen as more foreign investors are piling into the US$18 trillion Chinese bond market as index compilers have moved to add more Chinese debt to their major benchmarks. Foreign investors own just 3 per cent of China’s onshore bond market, according to data from the People’s Bank of China, Shanghai Clearing House and the China Central Depositary & Clearing.

The uncertainty over the transaction has prompted three major credit rating agencies to put Huarong’s debt ratings on review for a potential downgrade. Meanwhile, Chinese media outlet Caixin reported this week that the company had delayed its results because of a financial restructuring, with Caixin’s managing editor raising the possibility of a bankruptcy in an opinion piece on Monday.

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“It is unclear what the details of the relevant transaction are and when its 2020 annual results will be published,” David Yin, a senior analyst at Moody’s Investors Service, wrote in a report on Tuesday. “The potential impact on [Huarong’s] credit profile is uncertain, because there are a number of diverse scenarios that could affect its [baseline credit assessment] and potential government support.”

The company did not respond to a request for comment on Wednesday.

For bondholders, concerns over the state of the manager’s health – and whether they would be forced to take losses amid a potential restructuring – are growing.

Huarong’s most actively-traded bond – a US$1.5 billion perpetual bond issued four years ago – has lost about 30 cents on the dollar during the past two weeks and was quoted at 64 cents on Wednesday, according to prices compiled by Bloomberg.

A separate US$800 million bond maturing in 2025 dropped by 34 cents over the past two weeks to 77.5 cents on the dollar. Issued in 2015, the debt has seen its trading volume surge this month after its price began to sink below par.

Investors in these two bonds include BlackRock, Prudential, HSBC, Neuberger Berman, Invesco, and Chinese manager E Fund Management.

Set up two decades ago specifically to help Beijing manage state-owned banks’ bad debt, Huarong has today developed into a financial institution capable of offering financial leasing, banking and securities brokerage services. These services contributed about 36 per cent of Huarong Asset Management’s total income, according to its 2020 first half results.

Lai Xiaomin, the former head of the state-owned China Huarong Asset Management Company, was sentenced to death in January after he was convicted on bribery and other charges. Photo: AP

Under its former chairman, Lai Xiaomin, the company expanded beyond its original mandate of managing soured debt into securities trading, trusts and other investment products.

Lai was executed in January after he was found guilty of bribery, corruption and bigamy charges. Lai was accused of accepting bribes when he was party secretary and Huarong’s chairman between 2008 and 2018.

Speculation is rife that those subsidiaries could be part of a potential restructuring.

Another potential outcome: China’s Ministry of Finance, Huarong’s biggest shareholder, is considering transferring its ownership stake to Central Huijin Investment, a sovereign wealth fund, Bloomberg News reported on Tuesday, citing a person familiar with the matter.

Concerns about Huarong’s outlook also follow a series of missed payments and defaults by state-owned entities, including a mine operator owned by the Henan provincial government, which have triggered concerns about credit risks.

At the same time, dollar bond issuance by Chinese companies has slowed to its lowest level in years as Beijing once again focuses on cutting debt as the country’s economy returns to more normal levels following the coronavirus pandemic and the cost of refinancing debt overseas debt is higher as yields rise.

While a restructuring or other transaction could enhance Huarong’s credit metrics, the downside risk to the company is higher, S&P Global Ratings analysts said in a note on Friday.

“This is because the company’s operating performance and asset quality were weaker than that of peers in recent years, largely due to legacy exposures associated with its ex-chairman,” S&P said.