SHANGHAI: Chinese corporate dollar bond issuers are facing rising financing pressure after asset management giant China Huarong Asset Management Co delayed the release of its annual results, prompting broader concerns over issuers’ creditworthiness.
Investors are concerned that any debt restructuring by the company, which counts China’s Ministry of Finance as its biggest shareholder, could leave holders of its US dollar bonds unprotected and force an expensive reassessment of long-standing government support for Chinese state-owned issuers.
Huarong, a manager of non-performing loans set up by the government two decades ago and one of China’s four biggest asset management companies (AMCs), has had its Hong Kong shares suspended since March 31 after it announced a delay in its earnings report due to a “relevant transaction” yet to be finalised.
Huarong Asset Management currently has outstanding dollar bonds worth $21.3 billion, according to research firm Gavekal.
The yield on a November 2021 medium term note issued by Huarong’s subsidiary’s Huarong Finance II Co was last quoted at 82.073%, up from 1.729% a week ago.
“The offshore bond price continues to slide as there are no rumours, or proposals, or anything about how to deal with (Huarong’s) offshore debts,” said a fund manager in Hong Kong.
Market concerns have spilled over into other issuers. The yield on a $800 million note issued by a subsidiary of China Great Wall Asset Management Co maturing on April 27 stood at 1.205% on Thursday, up nearly 13 basis points (bps) in a week.
“It’s a good reminder that being state-owned ultimately doesn’t equal sovereign risk, and it’s a reminder to assess ... whether the premium that one gets paid for buying into a state-owned enterprise debt is sufficiently rewarding for the risk that one takes,” said Michel Lowy, CEO of SC Lowy, an asset manager focused on high yield to distressed credit, special situations and regulated financial institution turnarounds.
Calls to Huarong went unanswered on Thursday.
Global rating agencies Moody’s and Fitch this week placed Huarong’s ratings on review for possible downgrades, citing uncertainty following its delayed results.
Jitters have lifted the cost of insurance against a default in China’s dollar debt to its highest since October.
The ITRAXX credit default swap index for Asia has widened to 89 bps, from 63 a week ago.
“This is not even a state-owned enterprise in some sunset industry .. this is central to the financial infrastructure of the state banking system in China,” said Fraser Howie, an independent commentator and author of several books about China’s financial system.
While seeing little risk of a major debt restructuring that would leave foreign investors facing significant haircuts, he said the market is in “uncharted territory” given the lack of official reassurance to date.
“Do I think it’ll be allowed to completely default? No I don’t think so. But that’s a bit like saying halfway through the Cuban Missile Crisis, ‘ah go to the beach, it will be fine’. It’s a very real risk at the moment until it’s defused.”
Onshore investors have displayed more faith in the creditworthiness of even weaker corporate issuers, with the spread of one-year AA rated corporate debt over the government benchmark rising less than 3 bps over the past month.
Huarong faced financing challenges and a sell-off in its stock in 2018 after then-chairman Lai Xiaomin was targeted in an anti-corruption investigation. Lai was executed in January following his conviction on bribery charges.
A Tianjin court found Lai guilty of charges including taking 1.79 billion yuan in bribes, in the country’s biggest financial corruption case since the founding of the People’s Republic of China in 1949.
Under Lai, Huarong expanded rapidly to become a broad financial holding company, and created a massive pile of distressed debt through its investments. As of mid-2020, Huarong had 160 billion yuan in net assets, and more than 30 billion yuan in loan-loss provisions.
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