China Huarong’s worsening bond rout stokes market contagion


Growing panic over the financial health of one of China’s largest bad-debt managers spilled into the broader market, as traders circulated a Caixin report that openly considered the worst-case scenario for the company.

China Huarong Asset Management Co.’s US$300 million 3.375 per cent bond due May 2022 tumbled 13.1 cents on the dollar to 76.1 cents, while a 5 per cent bond maturing in 2025 fell 12.1 cents to 77.3 cents, Bloomberg-compiled prices show. In a commentary dated Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy.

The firm’s dollar bonds edged up from session lows after Bloomberg reported China’s finance ministry is mulling transferring its stake in China Huarong to a unit of the nation’s sovereign wealth fund that invests in financial companies. Some notes rose as much as 2 cents, though are still set for record closing lows.

Moody’s Investors Service and Fitch Ratings said Tuesday they will review their ratings of China Huarong for a potential downgrade, following a similar announcement from rival S&P Global Ratings last week. The company is considered an investment-grade issuer by all three agencies.

The selloff spread to other high-yield Chinese dollar notes on Tuesday, with some property bonds falling by a record. Asia’s investment-grade dollar debt spreads widened as much as 3 basis points, while a gauge of Asia credit risk widened for a seventh straight day, set for the longest rising streak since 2018.

Chinese investment-grade dollar bond spreads widened by as much as 8 basis points, while prices on the nation’s high-yield notes fell as much as 3 cents on the dollar, according to credit traders. The CSI 300 Index of stocks fell 0.2 per cent.

“Huarong is a US$22 billion curve and as a distressed situation it dwarfs anything that we have seen in the Asia credit market before,” said Owen Gallimore, head of trading strategy at Australia & New Zealand Banking Group. “This is a fatal event for a few trading desks and small funds.”

Bonds linked to the company have plunged this month after China Huarong failed to publish its 2020 preliminary results by the March 31 deadline, with Caixin attributing the delay to plans for a significant financial restructuring. The stock has been suspended in Hong Kong since April 1. The company has until the end of the month to release its final earnings report. China Huarong’s biggest shareholder is the country’s Ministry of Finance.

“Market speculation of a restructuring with haircuts for Huarong International bondholders is heavily damaging investor sentiment,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “The continued silence of Chinese authorities on the predicament of a strategic state-owned institution as large as Huarong is also worrisome, as investors had anticipated at least a modicum of reassurance.”

It’s unclear whether Chinese leaders have discussed the fate of China Huarong’s bondholders or outlined specific measures that the fund would take if it assumes control of the China Huarong stake.

China Huarong has been under a shadow since its then-chairman Lai Xiaomin came under investigation in 2018. Under his watch, the company expanded into areas including securities trading, trusts and other investments, deviating from the original mandate of disposing bad debt. Lai was put to death earlier this year for bribery after a brief trial, an unusually harsh sentence for such a crime.

The company is one of the four state-owned entities set up by China’s government in 1999 to help clean up a banking system riddled with bad debt. It listed in Hong Kong after a US$2.5 billion initial public offering in 2015.

China Huarong and its subsidiaries have some US$42 billion worth of offshore and local bonds outstanding and 41 per cent of that will come due by the end of next year, according to Bloomberg-compiled data. Dollar bonds make up about US$22 billion of its outstanding notes.

Because the debt load is so large and the company was previously seen as a safe bet, the securities are widely held by both local and international investors. Institutional investors such as BlackRock Inc. and Goldman Sachs Group Inc. previously disclosed they held Huarong bonds, had exposure to them via fund products or both, according to data compiled by Bloomberg.

China Huarong has started trimming non-core assets amid regulatory pressure to return to its roots. Net income slumped 92 per cent in the first half of 2020 from a year earlier as the value of some assets dropped in the wake of the COVID-19 pandemic. The company’s stock market value has tumbled to about US$5 billion from US$15 billion when it listed.

–With assistance from Kevin Kingsbury and Finbarr Flynn.


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