UPDATE 3-China Huarong bonds fall on downgrade as repayment fails to soothe nerves

(Updates prices on China CDS, Huarong bonds)

SHANGHAI, April 27 (Reuters) - Bonds issued by subsidiaries of Chinese state-owned bad loan giant China Huarong Asset Management Co fell on Tuesday, after Fitch Ratings downgraded the parent company, even as Huarong companies met some debt repayment deadlines.

Fitch Ratings said late on Monday that it had downgraded the long-term issuer default rating of China Huarong by three notches to ‘BBB’ from ‘A’, due to doubts over the strength of its government backing, leaving the company on watch for potential further downgrades.

“Fitch believes the government sponsor’s indication of support has not been as forthcoming amid China Huarong’s weakness in its offshore funding channel after the company announced a delay in publishing its annual results,” Fitch said.

Fitch said in a statement it had also downgraded notes issued by several Huarong subsidiaries. It cut Huarong’s senior unsecured perpetual notes and legally subordinated perpetual notes by an extra notch, to ‘BB+’ from ‘A-‘, and to ‘BB-’ from ‘BBB’, respectively, putting them in high-yield territory.

“Because of the downgrade to high-yield from investment grade, some professional investors who link investments with ratings may need to cut their positions,” a Huarong investor told Reuters. “If the other two agencies have similar moves, Huarong bonds could face another round of selloffs.”

Bids on a $250 million perpetual bond issued by Huarong Finance 2019 Co Ltd were quoted by Refinitiv at 55 cents on Tuesday during the New York session, down 5 cents from the prior session. Bids on a S$400 million ($301.80 million) November 2025 bond issued by Huarong Finance 2017 Co Ltd dropped more than 10 cents from a day earlier to less than 70 cents.

The falls came despite Huarong Finance 2017 Co repaying the principal and interest on a S$600 million bond on time on Tuesday.

Separately, Huarong Rongde Asset Management Co repaid 960 million yuan in principal and interest on a maturing onshore exchange-traded corporate bond on Tuesday, the company said in a WeChat post.

Market sentiment was still “quite weak” even after the successful repayments, said an onshore portfolio manager.

Huarong counts China’s Ministry of Finance as its biggest shareholder. Hurt by failed investments, aggressive expansion and a high-profile corruption case that culminated in the execution of its former chairman, the company has been in restructuring talks since 2018.

Concerns that restructuring of Huarong’s debt could lead to a possible rerating and repricing of the world’s second-biggest bond market have weighed on Chinese dollar debt issuers.

China Huarong’s missed March 31 deadline for filing its 2020 earnings results sparked a rout in its dollar bonds that spread into other issuers, amid concern that a default could leave foreign investors facing haircuts.

“If the government did decide that what they wanted to do was to impose a haircut on bondholders, rather than go down some other route, it would lead to a repricing across many parts of the Chinese corporate space, which ultimately would raise the cost of funding,” said Anthony Kettle, senior portfolio manager, BlueBay Asset Management.

Broader market concerns eased somewhat during U.S. trading on Tuesday as the cost to insure against defaults on China’s dollar debt dipped. China five-year credit default swaps fell by 1 basis point in New York on Tuesday to 39 basis points from 40 basis points Monday, data from HIS Markit showed. The CDS hit 44 basis points on April 14 when concerns about Huarong peaked.

Reuters reported on Monday that the company will release earnings as soon as next month and before the end of August, after China Huarong said it would miss a second April 30 deadline.

Huarong could not be reached for comment on Tuesday, and China’s central bank and Ministry of Finance did not immediately respond to requests for comment. ($1 = 1.3254 Singapore dollars) (Additional reporting by Kate Duguid in New York, Cheng Leng in Beijing and Tom Arnold in London; Editing by Alden Bentley, Kim Coghill, Jacqueline Wong and Louise Heavens)