Huarong Woes Worsen as Firm Withdraws Its China Listing Plan

(Bloomberg) -- China Huarong Asset Management Co., whose former chairman is under investigation for graft, said it will withdraw plans for a listing in mainland China one week after the company reassured investors business was back to normal.

The decision was based on reasons including “a prominent” drop in earnings, the investigation and the surrounding uncertainty, the company said in a filing late Monday. The Beijing-based company had aimed to complete the Chinese listing in 2018.

Huarong is one of China’s four state-run bad-loan managers, and gained prominence this year with the purchase of an indirect stake in Russian oil giant Rosneft PJSC. However, questions have been raised about its investment decisions since Chairman Lai Xiaomin resigned in April, and the firm has been trying to cut debt amid the government’s campaign against financial risk.

“Our biggest concern is Huarong’s elevated leverage,” said Liang Yu, a Hong Kong-based analyst at S&P Global Ratings, which downgraded Huarong to BBB+ from A- on Aug. 28. “Without the ability to generate capital internally nor raising funds externally, Huarong wouldn’t reduce its leverage as fast as we had expected.”

Huarong’s Hong Kong shares fell as much as 2.8 percent on Tuesday, after dropping 5.3 percent on Monday. The stock has fallen 62 percent this year to an all-time low, compared with a 15 percent decline in the MSCI China Financials Index. Earlier this month, the company told analysts and investors it could withstand any losses after a 95 percent plunge in first-half profit and a disclosure that it’s in breach of bank covenants, primarily interest coverage.

Huarong also said that while Lai’s personal issues had a short-term impact, the business is back to normal and operating figures showed a significant improvement since mid-year. Lai stepped down after almost six years on the job, and is being investigated for alleged disciplinary and legal violations.

The firm’s woes coincided with a meltdown in Chinese stocks sparked by the nation’s escalating trade frictions with the U.S. It’s also grappling with bloated costs after total assets ballooned sixfold to 1.87 trillion yuan ($273 billion) in the five years through December, according to data compiled by Bloomberg.

Debt-fueled growth, falling profitability, and lower-than-expected capital replenishment plans pushed leverage to levels that triggered the downgrade, according to S&P. The ratings company said Huarong’s debt-to-equity ratio was 7.4 at the end of 2017, higher than the 6.5 number that indicates insufficient capital.

Huarong’s market capitalization is roughly $8 billion, about half the value it held in 2015 following the sale of about 6 billion shares that raised $2.5 billion. The China-listing plans that have now been scrapped would have seen the company sell up to 6.9 billion shares.

Huarong has been the “most aggressive” among its peers, having “invested heavily in high-yielding offshore bonds,” according to Yu. “Now the government’s only mandate for them is to go back to the core business of being a bad-loan manager.”

©2018 Bloomberg L.P.