Caixin
Apr 15, 2021 08:51 PM
FINANCE

After China Huarong’s Bond Rout, Spotlight Shifts to Overseas Financing Unit

Hong Kong-based Huarong International is its parent’s most critical overseas financing and investment vehicle. Photo: VCG
Hong Kong-based Huarong International is its parent’s most critical overseas financing and investment vehicle. Photo: VCG

Amid this week’s rout of China Huarong Asset Management Co. Ltd.’s overseas bonds, attention has also turned to the state-owned bad-debt manager’s major Hong Kong financial arm that guarantees the lion’s share of the bonds.

Investors are watching whether China Huarong will restructure China Huarong International Holdings Ltd. and how the once high-profile financial conglomerate is going to repay its overseas bonds, analysts at investment bank China International Capital Corp. Ltd. (601995.SH) wrote in a note (link in Chinese) on Monday.

Hong Kong-based Huarong International is its parent’s most critical overseas financing and investment vehicle and is also the guarantor of $22.3 billion in outstanding dollar bonds linked to China Huarong, analysts at Chinese firm CIB Research wrote in a note Monday. That accounts for 96% of China Huarong’s total outstanding overseas bonds worth $23.3 billion.

Huarong International itself has an extremely high leverage level and asset quality problems that could be further exposed in the future, the CIB Research analysts said. At the end of 2018, it has a liability-to-asset ratio of 91%.

Judging from the corruption case of former China Huarong Chairman Lai Xiaomin, Huarong International had governance problems related to its overseas investments, the CIB Research analysts said. China Huarong is likely to speed up its disposal of overseas assets as it works to get back to its roots as a bad-asset manager, they said.

In January, Lai was executed for taking a record number of bribes, among other crimes.

The uncertainties about whether China Huarong can repay its overseas bonds also stem from its use of “keepwell deeds.” The company has these provisions on $21.3 billion in outstanding dollar bonds issued by one of its overseas firms and guaranteed by Huarong International, the Industrial Bank analysts said. Chinese companies usually used such provisions to facilitate offshore bond sales by their overseas subsidiaries.

The repayment of the dollar bonds in the future will test the legal status of such provisions, the CIB Research analysts wrote. Last year, state-owned Peking University Founder Group Corp., which was undergoing bankruptcy restructuring, refused to recognize some dollar bonds issued by two overseas subsidiaries as its own debt, even though the bonds were backed by its keepwell deeds.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

Read more about Caixin’s coverage of Huarong and Lai Xiaomin’s case:

Ling Huawei: Huarong Can’t Be Treated Like a Normal Company in Bankruptcy Restructuring

In Depth: Bad Business at a ‘Bad Bank’

Disgraced Financial Bigshot Accused of Taking More Bribes Than Anyone Else in China

Exclusive: Fallen Chief of Bad-Asset Manager Had Tons of Cash — Literally

Bad-Asset Management Chief Accused of Bribery, Cronyism

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