Investors reassess China’s Huarong risk as contagion fears subside



Investors sold off Huarong’s offshore bonds last week, pushing up yields as they worried about the company’s 2020 earnings delay due to unspecified “relevant transactions”.

Some feared that the debt restructuring of one of China’s four largest bad-loan state companies would affect its ability to make payments on offshore bonds worth more than $ 22 billion.

“There is fear because in China the odds are very often binary,” said Michel Lowy, CEO of SC Lowy, an asset manager focused on high yield to troubled credit, special situations and turnarounds. ‘regulated financial institutions.

“In other more sophisticated markets, your recovery range may be 50 to 80 cents. In China, it’s the parity or 20 cents.”

China’s banking and insurance regulator on Friday said Huarong was operating normally and had sufficient liquidity. Subsidiary Huarong Securities Co Ltd then repaid a 2.5 billion yuan ($ 384.83 million) maturing bond, she said in a post on her official WeChat account.

On Tuesday, the yield on an $ 850 million bond in April 2027 issued by Huarong Finance 2017 Co Ltd was listed at 8.17% after peaking at nearly 17% on Thursday, as fears dissipated.

As few investors question Huarong’s ability to repay its onshore debt, regulators have asked banks not to refuse to lend to the company as part of measures to stabilize its cash position.

Concerns around Huarong have focused not only on possible losses for bondholders, but what a default would mean for the risk assessment and pricing of debt issued by SOEs. . Some investors are now saying those concerns were overblown.

“I think we need to take a more measured approach to stocks like this,” said Mervyn Koh, portfolio manager at Janus Henderson Investors. “Overall, we tend to give the central government the benefit of the doubt” in handling SOE defaults, he said.

Investors are nevertheless watching closely Huarong ahead of the April 27 maturity of a S $ 600 million ($ 452.18 million) bond issued by subsidiary Huarong Finance 2017 Co Ltd.

The average price of this bond was last listed at 97.5 cents, down from 92 cents last week. A portfolio manager in Hong Kong said investors demanded a slight haircut amid the lingering uncertainty.

“It will be essential that the events around Huarong be treated credibly as foreign capital and the treatment of investors will be followed with great interest by all,” said Brian Kloss, portfolio manager at Brandywine Global.

Larry Hu, chief China economist at Macquarie, said in a note that investors don’t have to worry much about the systemic risks posed by Huarong, but that it could signal future market turmoil.

“The stress caused by Huarong is likely to be the start of a series of credit events,” he said.

(1 USD = 1.3269 Singapore dollars)

($ 1 = 6.4963 Chinese yuan)

(Reporting by Andrew Galbraith in Shanghai; additional reporting by Kate Duguid in New York; editing by Ed Osmond, Larry King)

By Andrew Galbraith


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