Huarong Default Bets Widen Gulf Between Short and Long Bonds

Gauging when China Huarong Asset Management Co. may default or unveil a debt restructuring has become a tricky part of a bondholder’s strategy.

While the state-owned financial firm’s longer-term bonds are sinking toward record lows amid expectations investors will be forced to take on losses as part of an overhaul, notes maturing over the next few months trade at much higher levels. That suggests bondholders remain confident the company will continue to repay its debts on time and any restructuring is a way off.

Huarong’s $400 million note maturing in July trades at 94 cents on the dollar. That compares with around 66 cents for its 2.125% bond due 2023 and 53 cents for its 4.5% perpetual bond.

The divergence will have to narrow at some stage if a debt restructuring becomes closer to reality, though how long that might take continues to be a mystery. Beijing has given little away about the company’s future, leaving traders to rely on a drip-feed of news from local and international media. The New York Times reported this week that the central government is still in the early stages of a plan to overhaul Huarong -- one that would inflict “significant losses” on both domestic and foreign bondholders.

Huarong Default Bets Widen Gulf Between Short and Long Bonds

Concern that the company will run out of funds in the short-term has been assuaged by reports that the state will continue to support it for now. According to a Bloomberg News report this week, Huarong has reached funding agreements with state-owned banks to ensure it can repay debt through at least the end of August.

“If debt restructuring occurs, the subordinated perpetuals are the closest to equity and will likely see the largest haircuts,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “On the other hand, shorter-dated debt could still be repaid if they mature before the restructuring decision is finalized by authorities.”

Huarong has been repaying its maturing bonds on time and said as recently as May 13 it had seen no change in government support. The company has the equivalent of about $2.5 billion in offshore and onshore bonds coming due through August, data compiled by Bloomberg show.

Bond prices suggest investors see significantly higher default risk from about 12 months out. The firm’s 3.375% bond due May 2022 is at 72 cents on the dollar after falling 12 cents this week, Bloomberg-compiled prices show. Still, that’s some 7 cents higher than the record low it hit in mid-April.

©2021 Bloomberg L.P.

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