No Respite for Huarong Investors as Earnings Delay Adds to Chaos
(Bloomberg) -- What investors in China Huarong Asset Management Co. want is transparency over its future. What they’re getting is a lesson in how opaque Chinese state-owned companies can be.
On Sunday, the embattled firm announced it wouldn’t publish its 2020 earnings by the end of this month -- the deadline required by Hong Kong’s stock exchange. Instead of providing clarity, the company released a thinly-worded statement in Chinese only, mostly reiterating information that investors already knew. There was no indication of when results would be published or if anything has changed since its April 1 filing to the city’s exchange, where China Huarong shares trade.
Reaction in the offshore bond market was negative on Monday, underscoring concerns among international investors that they’re low on China Huarong’s priority list. The bad-debt manager chose to publish the widely anticipated update on an online platform run by China’s interbank and foreign exchange trading system, rather than on Hong Kong’s exchange as would be typical for a listed company. Last week, the company’s offshore unit said it returned to profit in a statement posted on its WeChat account.
“Bondholders have no leverage over management,” said Owen Gallimore, head of trading strategy at Australia & New Zealand Banking Group. “Initially we were told that it was a simple auditor delay, in-line with many others companies’ late filings at the time. Then we were comforted that ‘operations normal and liquidity ample’ with the annual report out soon. But we are still waiting.”
China Huarong’s 3.75% dollar bond due 2022 fell 3.5 cents on the dollar to 81.9, while the firm’s 4.5% perpetual bond dropped 5.4 cents to 70.3 cents, Bloomberg-compiled prices show.
The offhand approach to international investors comes with a cost. Increased uncertainty boosts volatility in the company’s investment-grade debt, making the instruments trade more like stressed bonds. This effectively prevents China Huarong from selling more dollar debt, making it harder for the firm to refinance. The company has some $7 billion in local and offshore bonds maturing this year, including S$600 million ($453 million) and 915 million yuan ($141 million) notes both due April 27, Bloomberg-compiled data show.
There’s a broader impact too as investors become more selective toward Chinese firms. While ultra-safe firms like Bank of China Ltd. units and Tencent Holdings Ltd. have raised funds in the offshore bond market this month, only one first-time Chinese dollar-bond issuer has tapped the market. That’s down from a monthly average of about eight deals from debut issuers last year. Spreads on a Bloomberg Barclays index of investment-grade Chinese dollar bonds rose to nine-month highs in mid-April.
The central government may be encouraged by such concerns, provided they don’t turn into panic. President Xi Jinping wants to introduce moral hazard to the nation’s financial markets so that investors punish companies for poor governance, rather than expecting Beijing to bail them out.
As for China Huarong -- its most important shareholder is the state, and public disclosures will likely be dictated by officials more focused on ensuring an outcome that doesn’t undermine financial stability. As China’s largest bad loan manager, the company is a key player in the country’s $54 trillion financial industry.
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Still, given bond and stockholders are likely to bear some of the cost of a successful resolution to China Huarong’s financial issues, greater openness would be welcomed. Because official communication from China Huarong is lacking in frequency and detail, investors have to turn to media reports, where interpreting the news can also be difficult.
China’s regulator has asked banks to extend some loans by at least six months, said a Friday REDD report. The central bank is considering taking on some China Huarong assets, people with knowledge of the matter told Bloomberg News last week. Another report from Reorg Research said a debt restructuring for China Huarong International Holdings Ltd. was one option under consideration.
While frustrated bondholders can always sell, holders of the Hong Kong shares are stuck in limbo with no resolution in sight.
“Stock investors can’t really do anything at the moment,” said Jackson Wong, Amber Hill Capital Ltd. asset management director in Hong Kong. “It’s very hard to price the stock. Doing off-market transactions involves complex valuations and high trading costs -- only very large institutions could choose to do so if the stock remains suspended for a longer time.”
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