Huarong Bailout Leads Moody’s and Fitch to Opposite Verdicts

(Bloomberg) -- China Huarong Asset Management Co.’s $16 billion loss and state-led bailout is prompting divergent views among two of the world’s biggest bond-rating firms.

The bad-debt manager’s credit rating was cut on Monday by Moody’s Investors Service to Baa2, two notches above a speculative-grade level, and remains on review for a potential further downgrade. Minutes after Moody’s announcement, Fitch Ratings disclosed it revised its ratings watch to positive from negative on its same-level BBB grade.

The divergent responses reflect a more optimistic view from Fitch, whose analysts wrote in a Monday report that the recapitalization plan involving state-owned firms shows “a form of extraordinary support” from authorities. By contrast, Moody’s downgrade cited the deterioration of the asset manager’s capital and profitability. While a capital injection by a group of state-owned enterprises indicates Huarong’s “systemic importance,” the plan’s exact impact remains unclear, according to Moody’s analysts. 

Huarong’s fate has gripped global investors for nearly five months. Worries about the state-owned company’s financial health intensified after it missed a deadline at the end of March for releasing last year’s results. The ensuing drama rattled Chinese credit markets and emerged as a key test for the country’s vast, debt-ridden financial system.

The asset manager’s dollar bonds rallied in recent days as details of a recapitalization plan emerged. The firm’s 5% bond due 2025 was indicated weaker at 95.4 cents on the dollar Tuesday morning, close to its highest price since early April after gaining for seven consecutive days, Bloomberg-compiled prices show. 

Moody’s and Fitch downgraded Huarong in April amid a lack of clarity over the extent of Beijing’s future support. S&P Global Ratings has reiterated its BBB+ rating while keeping the firm on watch for a possible downgrade. Last week, a Moody’s analyst said the planned recapitalization “will likely meaningfully mitigate the negative credit impact” of the projected 2020 loss.

Months of uncertainty since April effectively shut out Huarong from overseas public debt markets, compounding debt refinance concerns given the company has $21 billion in outstanding offshore bonds. The firm has been servicing its debt, and said preparations have been made for future bond payments. Huarong reached funding agreements with state-owned banks to ensure it can repay debt through at least the end of August. 

If Huarong lost its investment-grade credit rating, 56% of surveyed fund managers that hold its dollar bonds would be forced to sell, according to a Bank of America report dated Aug. 17. 

Worries about Huarong kept many of its dollar notes at what are considered stressed levels, amid speculation of potential losses for bondholders as part of a company overhaul. But only 4% of investors predicted a default in a midyear survey by Citigroup Inc., compared with 47% predicting sufficient state support to avoid a missed payment. 

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