Not Safe, Not Distressed: Huarong Bonds Are in No Man’s Land

China Huarong Asset Management Co.’s bonds are trading at the kind of price where investors don’t quite know how to treat them.

The selloff that accelerated this week, rocking markets across Asia, was so swift that the bad-debt manager is still rated investment grade by Moody’s Investors Service, Fitch Ratings and S&P Global Ratings -- even if some of its dollar bonds yield more than 40%. The rate on one note due November reached 75%. That’s likely to be a big problem for investors who bought the debt expecting it to be safe.

While China Huarong is no longer considered a bulletproof quasi-sovereign investment, it’s also not distressed enough to lure the type of investors that place bets on the hardest-hit companies. Some funds have China Huarong on their radar, but say prices aren’t sufficiently cheap for a company for which a resolution could take months -- or even years -- and in a worst-case scenario may leave bondholders with significant losses.

Not Safe, Not Distressed: Huarong Bonds Are in No Man’s Land

One Hong Kong distressed-debt investor, who declined to be identified discussing trading strategies, said he would consider buying the bonds only after they drop below 50 cents. A credit trader at another hedge fund, who also asked to remain anonymous, said he would wait until at least 30 cents. A third hedge fund manager with a focus on distressed debt and special situations said he would only consider buying at 20 cents, fearing Chinese authorities would be unlikely to provide backing for the offshore bonds.

Two of the company’s most actively traded dollar notes -- the 3.375% bond due May 2022 and a 5% bond maturing in 2025 -- were at 66.7 cents and 62.3 cents, respectively, on Wednesday.

Not Safe, Not Distressed: Huarong Bonds Are in No Man’s Land

China Huarong is struggling to find buying interest among credit investors after concern about the company’s financial health fueled a record slide in its dollar notes Tuesday. The selling has continued amid a lack of official updates from China Huarong or the country’s finance ministry -- its largest shareholder.

Institutional investors such as BlackRock Inc., Goldman Sachs Group Inc. and Allianz SE previously disclosed they held Huarong bonds, had exposure to them via fund products or both, according to data compiled by Bloomberg. James Barrineau, head of emerging-market debt at Schroder Investment, said the money manager hasn’t changed its positioning in the broader market for now.

“It’s too early to buy since there is not enough information available to assess the recoveries for offshore bonds in the absence of support from the shareholders,” said Michel Lowy, chief executive officer of Hong Kong-based alternative asset manager SC Lowy. The firm is focused on high yield, distressed credit, special situations and regulated financial institution turnaround across Asia and Europe.

China Huarong, itself a distressed-debt manager, failed to file its 2020 preliminary results before a March 31 exchange deadline, triggering a suspension in its Hong Kong-listed shares. The lack of clarity around the delay, combined with reports that the company is negotiating an overhaul plan with authorities, has spooked investors concerned about its finances.

Almost all of China Huarong’s $22 billion in dollar bonds are issued or guaranteed by China Huarong International Holdings Ltd., an offshore unit. While most feature a pledge from the onshore parent to keep the offshore subsidiary solvent, the so-called keepwell provision doesn’t guarantee payment to bondholders.

Because bonds of the investment-rated issuer are trading like high yield, China Huarong may look like an attractive opportunity to those with a greater tolerance for risk. One emerging-market debt manager based in Europe, who declined to be identified due to compliance issues, started buying the debt when the selloff began and increased his exposure on Tuesday.

What’s certain is that China Huarong debt is quickly moving up the risk spectrum, and the company’s investor base is shifting with it. The three global rating agencies have already placed China Huarong on review for a potential downgrade.

“It’s hard to assess the asset quality of Huarong right now,” said Zhang Zhijun, chairman of Beijing Dingnuo Capital, which focuses on distressed debt. Zhang’s firm is also staying clear of Huarong-related bonds for the moment.

©2021 Bloomberg L.P.

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