Huarong to Restructure, Exit Units in Downsizing Push

(Bloomberg) --

China Huarong Asset Management Co., the country’s bad-debt manager that has roiled markets with doubts about its future, will exit one unit and restructure another to focus on its core businesses as it seeks to shore up its finances.

Huarong plans a public transfer of its 70% equity in Huarong Consumer Finance to external parties, it said in a Hong Kong stock exchange filing on Monday. The state-owned company also intends to negotiate with the main institutional creditors of Huarong Trust’s outstanding debt to complete a “debt-to-equity swap and equity transfer,” it said.

Huarong’s shares have been suspended since it missed a deadline to report 2020 results at the end of March, kicking off big swings in the company’s bonds and speculation about its future. The embattled conglomerate has been looking to sell nearly all of its units outside of distressed debt as part of a government-approved downsizing plan to bolster its finances, people familiar with the matter have said. Huarong is viewed as an important test of Beijing’s willingness to backstop government-owned borrowers amid a record wave of defaults.

Huarong’s dollar bond due 2025 rose 1.5 cents on the dollar to 70.9 cents on Tuesday, its biggest jump in about two weeks, Bloomberg-compiled prices show.

“While it’s positive there is a plan and the firm will likely keep paying its near-term bonds, the debt equity swap is an ugly precedent and shows the risks people run if they’re longer in the curve,” according to Owen Gallimore, head of trading strategy at Australia & New Zealand Banking Group.

The ruling Communist Party has long put a premium on financial stability, but it also increasingly wants to improve the pricing of risk in local credit markets and wean investors off the assumption that overextended companies will always be bailed out.

The moves are intended to meet regulatory requirements on gradually exiting non-core businesses, according to the filing. The initial listing price of the 630 million shares it holds in Huarong Consumer Finance shall not be lower than the asset valuation results filed with the Ministry of Finance, Huarong added.

Huarong’s board also proposed changing the use of about HK$3 billion ($386 million) of proceeds raised from its 2015 initial public offering to provide capital contribution and fund support to major subsidiaries, according to a separate statement.

Shareholders will vote on the proposals at an extraordinary general meeting Aug. 17. Hong Kong-traded shares of Huarong will remain suspended pending the company’s publication of audited annual results for last year, according to Monday’s statement.

Huarong is expected to announce its past-due 2020 financial results before the end of this month, people familiar have said. The company has continued to repay maturing notes on time and reached agreements with state-owned banks to ensure it can meet obligations through at least the end of August.

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