BEIJING (BLOOMBERG) – Government-backed investors will recapitalise China Huarong Asset Management after the bad-debt manager posted a record US$15.9 billion (S$21.6 billion) loss, ending months of speculation over whether Beijing would deem the troubled financial giant too big to fail.
The rescue package unveiled on Wednesday (Aug 18), while thin on official details, suggests Chinese President Xi Jinping’s government is for now unwilling to allow a default by one of China’s most systemically important state-owned companies. It is likely to boost short-term confidence in China’s US$12 trillion credit market, even as it raises concerns about the longer-term dangers of a financial system where implicit government guarantees have enabled years of reckless borrowing.
State-owned investors including Citic Group, China Insurance Investment Co and China Life Asset Management Co will replenish Huarong’s capital, the nation’s biggest bad-loan manager said in an exchange filing on Wednesday. Huarong said it has no plan to restructure its debt, reiterating that it has made preparations for future bond payments.
The statement confirmed a Bloomberg report that Huarong was poised to receive fresh capital as part of an overhaul plan, according to sources familiar with the matter, who put the amount being discussed at about 50 billion yuan (S$10.5 billion). Control of the company would shift to Citic, the people had said, though details were still being finalised and could change.
The overhaul marks the government’s first major attempt to resolve a crisis at Huarong that has roiled the world’s second-largest credit market since April. The financial giant’s plight has become the biggest test in decades of the Chinese authorities’ willingness to support troubled state-owned borrowers amid a record wave of defaults.
“This is clearly a good signal that SOE support is still firmly in place when financial stability is at risk,” said Mr Kamil Amin, a credit strategist at UBS Group, referring to state-owned enterprises. “For financial systemically important issuers, I think the notion of being too big to fail holds more than for property developers, for example.”
Concerns have been swirling among investors over Huarong’s financial health and the lack of clarity on government support after the company delayed its earnings release. In separate exchange filings on Wednesday, Huarong reported a preliminary 2020 loss of 102.9 billion yuan and said the board will approve the results for last year as well as interim 2021 results on Aug 28.
China Huarong’s dollar bonds were rallying on Thursday morning to their highest levels since mid-April. The firm’s Huarong’s 4.5 per cent perpetual note rose 5.8 US cents on the dollar to 96.5 US cents, Bloomberg-compiled data show. That is up from a low of 50 US cents in May. Dollar bond spreads in China’s broader investment-grade market tightened by about 1 basis point, according to credit traders.
The details of the government’s ultimate decision on Huarong will be scrutinised by investors for its broader implications. The effort to help the company make good on its US$242 billion of liabilities – including about US$21 billion of offshore bonds – would neutralise a potential systemic risk to China’s financial system and make it easier for other state-owned borrowers to tap the credit market.
At the same time, the authorities may be wary of providing unconditional support. That would likely undermine Mr Xi’s campaign to curb reckless borrowing, much of which has been enabled by implicit government guarantees. When asked about Huarong last month, a spokesman for China’s banking regulator said the government addresses problems at risky companies with “market-oriented” solutions.
Some analysts have warned that rescuing troubled companies will only delay China’s reckoning with its record corporate debt pile, making it more painful when a crisis inevitably strikes.
“Overall we think it’s credit positive for investors, particularly those holding bonds with near-term maturities. From a cash flow perspective, the company will potentially refinance the bank loans it has taken to pay off the bonds maturing this year with proceeds from asset sales,” said Mr Amin of UBS. “Longer term, the company will need to show itself as stable and well-capitalised for investors to regain confidence and consider investing in new issues.”
If the potential strategic investment is implemented, it will replenish Huarong’s capital, consolidate its foundation for sustainable operations, and ensure it meets regulatory requirements, the firm said on Wednesday.
Huarong shares will remain suspended. The stock has tumbled 67 per cent since its 2015 listing.
Citic said in an exchange filing on Wednesday that Citic Group will become a substantial shareholder of Huarong, without giving more details.
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