Huarong Bond Losses Spread Onshore, Risking Downward Spiral

Concern over China Huarong Asset Management Co.’s financial health is deepening among domestic investors, threatening to worsen a selloff offshore.

The firm’s thinly traded 19 billion yuan note due 2022 fell 12% to 70.2 yuan on Thursday, according to Bloomberg-compiled data, while its 3.54% domestic bond maturing in November dropped 24% to 75.3 yuan, both on pace for record lows. The company’s dollar bonds also declined, with a 3.75% bond due 2022 falling 5.5 cents on the dollar to 73.6 cents, its weakest level in more than a month. Its 4.5% perpetual dollar note was on track to close at a record low of around 53 cents in U.S. hours, Bloomberg-compiled prices show.

Huarong’s domestic bonds had held up better than its dollar notes since the start of April as speculation grew over a possible debt restructuring at the company. The risk now is that a loss of confidence among mainland investors may reinforce nervousness offshore, creating a downward spiral. Several of China Huarong’s dollar notes are trading near their lows reached during the depths of the initial selloff last month.

“Many factors could be involved in China Huarong’s debt resolution and it will take time for any proposal to be finalized,” said Li Gen, chief executive officer of Beijing BG Capital Management Ltd. “Although Huarong could get some liquidity support from banks, it’s still unclear whether bonds will be repaid at a discount in the long term.”

Huarong Bond Losses Spread Onshore, Risking Downward Spiral

There’s been little clarity from authorities over the distressed debt manager’s future in recent days, despite conflicting media reports about whether the central government will allow the company to default. Failure to repay its debts would upend the long-held expectation by investors that Beijing will support companies owned by the central government. That’s helping to fuel volatility in the bonds.

Right now, the risk of a broader fallout in China’s credit market is low. Spreads on the nation’s domestic, lower-rated corporate bonds over comparable government notes are at about their lowest in two months, while yield premiums on offshore investment-grade bonds have improved since hitting a nine-month high at the height of the panic, Bloomberg-compiled data show.

While this is positive for Beijing’s efforts to create better market discipline without triggering financial turmoil, some analysts have said the lack of market contagion could embolden authorities to limit support for the company.

Caixin Media’s WeNews reported on May 12 that authorities had urged Huarong to solve its issues on its own. The New York Times said on Tuesday China’s government is “strongly committed” to making sure both foreign and domestic bondholders don’t receive full repayment of their principal.

For more, read:
Huarong Volatility Intensifies as Beijing Keeps Traders Guessing
China Huarong’s Journey From Safe Bet to Bad News: A Timeline
Huarong Bondholders May Face Significant Losses, NYT Reports
Huarong Domestic Bond’s Unexplained Drop Jolts Anxious Investors
Huarong Says No Change in State Support, Ready to Repay Debt

Huarong has been repaying its maturing bonds on time and said it had seen no change in government support. The company has the equivalent of about $2.83 billion in offshore and onshore bonds coming due through August, including a dollar note that matures Thursday, data compiled by Bloomberg show.

A unit of the firm, China Huarong International Holdings Ltd., said it has wired funds for principal and interest payment on a $300 million bond due May 20, according to a company statement Thursday. The firm was profitable in the January-April period, it added.

The financial giant owes domestic and international bondholders the equivalent of about $41 billion, following an ill-fated expansion under former Chairman Lai Xiaomin, who was executed for crimes including bribery in January. Huarong is majority owned by China’s Ministry of Finance and is deeply intertwined with the nation’s $54 trillion financial industry.

©2021 Bloomberg L.P.

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