China Huarong Investors Brace for Long-Awaited Financial Results

(Bloomberg) — Four months after China Huarong Asset Management Co. Ltd. shocked bondholders by failing to announce its 2020 results, the bad-debt manager may finally be on the cusp of unveiling its financial statements.

There is pressure for the state-owned company to act this month. Its offshore unit China Huarong International Holdings Ltd. has until the end of August to publish its earnings in order to avoid a technical default, according to S&P Global Ratings.

At stake is whether the company is able to survive on its own or whether it will require debt restructuring or recapitalization. So far, Huarong and the central government have provided few clues about the company’s financial health or its future. Such uncertainty has weighed on the company’s bonds and challenged long-held notions that the Communist Party will always step in to save state-owned firms perceived too big to fail.

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Thu Ha Chow, a portfolio manager at Loomis Sayles Investments Asia Pte. in Singapore, is waiting to see profitability figures for the different divisions, progress on asset sales and whether there have been any writedowns.

“Our base case is that there would be some weakness in the results from the impact of Covid, but overall there is sufficient capital for the business to continue as a going concern,” Chow said. “Any restructuring plan will only result if operations and asset quality are much worse than it has been in previous years.”

Huarong’s dollar bonds due January 2025 trade at about 77 cents on the dollar, suggesting investors are pricing in a relatively high risk of default for an investment-grade issuer. Its Hong Kong-traded shares have been suspended since the start of April.

Up till now, Huarong has repaid all its bonds on time and said last month it would redeem a $500 million perpetual note in September. The company has also reached agreements with state-owned banks to ensure it can meet obligations through at least the end of August, Bloomberg reported in May.

Chang Wei Liang, a macro strategist at DBS Bank Ltd., is expecting Huarong to reveal details of a corporate restructuring, with a possible one-time loss due to a re-evaluation of assets.

“We also expect transactions with other Chinese state-owned financial enterprises, as part of a restructuring that leaves Huarong focused only on its core business and fortified with capital reserves,” Chang said.

Huarong has been overhauling its business to restore confidence and shore up its finances. This includes plans to sell nearly all of its units outside of distressed debt as part of a government-approved downsizing plan, Bloomberg reported in June.

On Monday, Huarong said it would exit a consumer finance unit and negotiate with creditors of its Huarong Trust unit to complete a “debt-to-equity swap and equity transfer.” Shareholders will vote on the proposals at an extraordinary general meeting Aug. 17. The company is also planning to sell its stake in Ant Group Co.’s consumer finance unit, Bloomberg reported on Tuesday.

“While the debt-to-equity swap for Huarong Trust is a worrying precedent, debtholders are already braced for difficult treatment, resulting in a muted market,” DBS’s Chang said. “With this, the authorities could be more confident in estimating the market impact of the planned restructuring for larger business units of Huarong.”

Contact editor Michael Bellart (michaelbellart@caixin.com)

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