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Financials

China dollar issuers face pressure on Huarong debt concerns

SHANGHAI, April 15 (Reuters) - An index of China dollar issuers fell to a 10-month low this week as concerns increase over Chinese issuers’ creditworthiness after asset management giant China Huarong Asset Management Co delayed the release of its annual results.

The delay by a company that counts China’s Ministry of Finance as its biggest shareholder has prompted worries that any restructuring could leave holders of its U.S. dollar bonds unprotected, raising doubts about the creditworthiness of Chinese issuers even as foreign investors have flocked to the market.

The ICE Bank of America Asian Dollar Investment Grade Corporate China Issuers Index was last at 212.756, its lowest level since June 15, 2020, and down 2.5% from a record high in February.

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.

The yield on a February 2030 dollar bond of Huarong’s subsidiary’s Huarong Finance 2019 Co was last quoted at 10.154%, up from 3.775% on March 31.

The company and its subsidiaries currently have outstanding bonds worth $51.72 billion, of which $16.59 billion is due to mature this year, according to Refinitiv data.

“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.

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 the company’s delayed results.

Worries have spilled into the broader market, lifting 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 80 basis points (bps), from 63 a week ago.

Onshore investors have displayed more faith in Huarong’s ability to meet its obligations, with the spread of one-year AA rated corporate debt over the government benchmark rising less than 3 basis points over the past month.

Analysts also see little risk of a major debt restructuring.

“We see poor risk-reward for a major debt restructuring, particularly given no urgent need ... Our recent channel check with banks also shows a clear signal of no major debt restructuring from policymakers. Hence, we expect a manageable impact on the system,” analysts at Morgan Stanley said in a note.

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.

It has been under a spotlight this year since Lai was executed in January following his conviction on bribery charges.

A Tianjin court found Lai guilty of taking a record 1.79 billion yuan in bribes, colluding with others to embezzle 25.1 million yuan of public funds, and bigamy, in the country’s biggest financial corruption case since the founding of the People’s Republic of China in 1949.

Under Lai’s tenure, Huarong expanded rapidly to become a broader financial holding company, and created a massive pile of distressed debt through its investments during the period.

As of mid-2020, Huarong had 160 billion yuan in net assets, and more than 30 billion yuan in loan-loss provisions. ($1 = 6.5387 Chinese yuan) (Reporting by Andrew Galbraith in Shanghai; Additional reporting by Cheng Leng in Beijing; Editing by Kim Coghill)

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