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Six months after its chairman, Lai Xiaomin, was convicted of corruption and executed, the fate of China’s largest bad debt management company Huarong Asset Management is no longer clear, and Beijing’s stakes are rising.

As one of the four state-owned asset management companies established in 1999 to clean up banking debts after the Asian financial crisis, Huarong’s turmoil has intensified since the death of Mr. Lai.

The failure to publish the 2020 financial accounts and the uncertainty of the assets of 1.7 billion yuan (US$261 billion) on the balance sheet triggered sharp fluctuations in the group’s US$22 billion denominated bonds sold to international investors.

The prospect of the upcoming maturity of US$100 billion in Chinese corporate debt this year has injected further urgency into the future of the group that has been far behind as a prudent bad debt manager in the past decade.

“We didn’t expect it, but if Huarong’s situation leads to a default, what does the government’s support for other state-owned entities mean?” said Charles Chang, director of the rating agency Standard & Poor’s (S&P). “If it turns out that there is a default or reorganization, we will need to look at all [of them]”.

This month, after the authorities, concerns about Beijing’s practice of companies set up to deal with China’s bad debts and non-performing loans intensified. Investigate Hu Xiaogang, vice president of China Great Wall Asset Management and former executive of China Orient Asset Management.

Great Wall and Dongfang, as well as Cinda and Huarong, constitute a quartet of bad debt management companies. Like the non-performing banks established in Spain and Ireland after the Eurozone crisis, their purpose is to take on non-performing loans from the banking system-which is still important in China’s financial system.

However, as the memory of the Asian crisis faded, asset management companies did not shrink in size, but began to expand freely. Between 2013 and 2018, these four asset management companies raised more than US$100 billion from the debt market.

Everyone is looking beyond China, but Huarong is by far the most aggressive. According to data from Standard & Poor’s, in 2015 alone, its international assets have expanded by more than 300%. In the same year, after obtaining strategic investments from Goldman Sachs and Warburg Pincus, part of its business was listed in Hong Kong.

The firepower of Huarong’s overseas activities largely came from the $22 billion denominated debt raised by its international branches, which the company has since attributed to Lai.

CreditSights analyst Jason Tan said: “During the tenure of the former chairman, Huarong expanded to many business lines that were not related to its core mission of bad debt management.” This “eventually led to the downfall of the chairman and the liquidation of the company.”

Huarong’s overseas investment has helped Chinese companies obtain credit outside the mainland. One example is that it bought USD bonds sold by Chalco in 2016, which is one of the world’s largest metal producers, rather than a financially troubled company. Chinese companies often use Hong Kong to issue dollar-denominated bonds outside the domestic financial market to tap the needs of international investors.

It also bought bonds sold by Country Garden, a private real estate developer that has become one of China’s most well-known real estate companies. The industry is currently facing pressure from Beijing to reduce its debt. In 2017, Huarong also helped developer Zhonghong Holdings purchase a U.S. amusement park operator Seaworld Entertainment’s US$449 million stake.

Lai Xiaomin, taken in 2016, was convicted of corruption and executed earlier this year © Anthony Kwan/Bloomberg

During a period of seemingly uncontrolled growth, its assets surged sevenfold between 2012 and 2018, and Huarong established its own banking, brokerage, insurance, and leasing divisions, as well as entering real estate development.

Ronald Thompson, managing director of Alvarez & Marsal Asia, said that when the country’s financial system is growing rapidly, bad debt management companies have become “financial supermarkets.”

Huarong’s own expansion beyond the original scope of its powers was partly due to the assumption of the company’s problematic debts that eventually led it to obtain ownership of these businesses.

“where is it [in] In the United States, we will have high-yield lenders, we will have high-yield bonds, we will have private equity companies, and asset management companies have partially filled this role in China,” Thompson said.

“If you are the owner of an AMC [asset management company] Your future is to close it next year according to the original design,” he added, “this may be bad for morale.”

In a statement to the Financial Times, Huarong stated that since 2018, it has “resolutely implemented the policy decisions of the Party Central Committee, the State Council and the regulatory authorities” and “refocused the core business of non-performing asset management”. .

As Huarong’s dollar debt is low, the pressing question facing investors and regulators is where reckless growth has left the group’s balance sheet.

According to the 2020 interim report released in August last year and the latest available data, the company is headquartered in Beijing and has only half the assets of its “troubled” division. The report covers other assets, including loans and debts to Chinese domestic companies.

Histogram of China Huarong Assets Total Assets (HK$ billion)

According to CreditSights data, the total assets of Huarong International Holdings, which issued USD bonds, were 198 billion Hong Kong dollars (US$25.6 billion) in the first half of 2020, a one-third decrease from 2017. They include stocks, convertible bonds, structured products and over-the-counter derivatives.

Although far less dazzling, Huarong’s overseas ambitions-and their looseness-echoed the echoes of HNA, Anbang, and Dalian Wanda. These three Chinese private conglomerates gained access to search around the world before the government cracked down in 2018. Licensing of quality assets.

It took several years for HNA to calm down. The creditors filed for bankruptcy only in January, after the court said that the once-popular group could not repay its debts.

Although Huarong is expected to play a key role in mainland China, especially in the context of further tightening of domestic credit conditions, the next move depends on Beijing.

“They may be trying to figure out what loopholes are,” said an investor in Hong Kong. “Once they figure out how big the hole is, they can decide whether to bridge the gap.”

The 4.5% coupon rate line chart of US$1.5 billion perpetual bonds shows that Huarong bonds plummeted

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