Caixin
Apr 17, 2021 01:06 AM
FINANCE

Huarong in Normal Operation with Ample Liquidity, Regulator Says

Huarong, one of China’s largest bad-asset managers, jolted the capital market after it failed to report earnings by the March 31 deadline.
Huarong, one of China’s largest bad-asset managers, jolted the capital market after it failed to report earnings by the March 31 deadline.

China’s financial regulator tried to calm investors in its first official comments on China Huarong Asset Management Co. after mounting concerns over the state-owned asset manager’s financial health sent jitters through the bond market.

“Operations at Huarong remain normal and the company has ample liquidity,” an official at the China Banking and Insurance Regulatory Commission said. “The company is actively cooperating with its auditor and will complete its annual report as soon as possible.” Huarong’s offshore bonds rebounded following the comments.

Huarong, one of China’s largest bad-asset managers, jolted the capital market after it failed to report earnings by the March 31 deadline. Trading of Huarong’s shares in Hong Kong has been suspended since April 1.

Established in 1999, Huarong is one of four national asset-management companies created to dispose of massive volumes of nonperforming assets held by China’s big state banks. It listed in Hong Kong after a $2.5 billion initial public offering in 2015.

Wang Wenjie, interim Huarong President, told investors on April 1 that auditors need more time to review the 2020 results as certain relevant transactions are still to be determined. Caixin learned that the “relevant transactions” likely referred to financial restructuring plans proposed to solve the company’s bad-asset troubles.

The failure to report annual earnings on time sparked doubts over the company’s financial condition, triggering selloffs of its bonds. Huarong’s dollar bonds tumbled to record lows in nearly one week following the announcement. While prices for several of the bonds later rebounded, the securities continue to trade at historically depressed levels as investors look for more clarity on the company’s finances and overhaul plan.

Huarong’s bond rout also sent shockwaves through the market and spread to other Chinese issuers including property developers.

Huarong and its subsidiaries have some $42 billion worth of offshore and local bonds outstanding and 41% of that will come due by the end of next year, according to data compiled by Bloomberg. Dollar bonds make up about $22 billion of its outstanding notes.

The company was left reeling in 2018 after former Chairman Lai Xiaomin was accused of bribery and ultimately found guilty of receiving 1.79 billion ($273 million) in illicit payments. Under his watch, Huarong expanded into areas including securities trading, trusts and other investments, deviating from the original mandate of disposing of bad debt.

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But the aggressive expansion through murky business with affiliated companies left Huarong with hundreds of billions of yuan of unresolved bad debt. Lai was sentenced to death in January and was later executed.

Following Lai’s downfall, Huarong has started trimming noncore assets amid regulatory pressure to return to its roots. Net income slumped 92% in the first half of 2020 from a year earlier as the value of some assets dropped in the wake of the Covid-19 pandemic. The company’s market value tumbled to about $5 billion from $15 billion when it listed.

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In a separate statement on Friday, Huarong said it will push forward business transformation this year and assured investors that it has ample access to liquidity. The company said it will comply with the Hong Kong stock market rules to release information about its 2020 earnings.

“Almost every bond (of Huarong) rebounded” following the CBIRC comments, said a Hong Kong bond trader. The company’s offshore bonds have rebounded nearly 20% since late Thursday when media reports said Huarong prepared funds to pay a S$600 million ($449 million) bond due April 27 in a bid to boost investors’ confidence. But many traders said it will be difficult for Huarong’s bonds to return their level before the selloff.

The company is still considered investment grade by Fitch, Moody’s Investors Service and S&P Global Ratings, though all three have said they will review their ratings for a potential downgrade.

Bloomberg contributed to the story

Contact reporter Han Wei (weihan@caixin.com)

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