There is pressure to resolve the fate of China’s bad debt manager Huarong

Six months after President Lai Xiaomin was found guilty of corruption and executed, Huarong Asset Management, the fate of China’s biggest bad debt manager, is no clearer and its commitment to Beijing is growing.

One of the four state-owned asset management companies created in 1999 to clear the debts of the banking sector after the Asian financial crisis, the turmoil in Huarong has deepened since Lai’s death.

The failure to release its financial accounts for 2020 and the lack of Rmb1.7tn ($ 261 billion) in assets on the balance sheet has caused major uncertainties in the $ 22 billion in bonds the group sold to international investors.

This year’s $ 100 billion opportunity to get out of the debt of China’s corporate corporations is becoming more urgent in order to fix the future of a group that left its roots as a strong debt manager over the last decade.

“We don’t expect it, but if the Huarong situation gets the default, what does that say about the government’s support for other government entities?” said Charles Chang, director of the S&P rating agency. “If it is verified that a default or restructuring is happening, we need to look at all of them [of them]”.

Concerns have been raised over the creation of bad debts and bad loans in Beijing this month. he opened the investigation Hu Xiaogang, vice president of the Great Wall Assets Management and a former executive at China Orient Asset Management.

The Great Wall and the East, along with Cinda and Huarong, form a quartet of bad debt managers. As with the bad banks that sprang up in Spain and Ireland after the eurozone crisis, they aimed to borrow money from the banking system – it is still an important function in China’s financial system.

But as memories of the Asian crisis faded rather than shrink in size, asset managers began to expand freely, with the four earning more than $ 100 billion from 2013 to 2018 from debt markets.

Everyone looked beyond China, but Huarong was the most aggressive. In 2015 alone, its international assets rose more than 300 percent, according to S&PEN. That year, it listed part of its Hong Kong business after strategic investments by Goldman Sachs and Warburg Pincus.

Huarong’s firepower for foreign activity, which the company has accused Lairi of, came largely from a $ 22 billion debt owed to its international weapons.

“During the tenure of the former chair, Huarong’s debt management expanded into many lines of business that have nothing to do with the basic authority of debt management,” said Jason Tan, an analyst at CreditSights. This “eventually caused the chair to collapse and lead to calculations for the company.”

Huarong’s foreign investment helped Chinese companies gain credit beyond the mainland. One example was the purchase of dollar debt sold in 2016 by China Aluminum (one of the world’s largest producers of the metal and not an economically damaged company). Chinese companies frequently issue dollar-denominated bonds through Hong Kong, outside the country’s financial markets, in response to demand from international investors.

He also bought bonds sold by Country Garden, a privately held real estate developer, which has become one of the most popular real estate companies in a sector in which China is pushing for debt reduction. In 2017, Huarong helped develop developer Zhonghong Holdings $ 449 million stake in US gaming park operator Seaworld Entertainment.

In a time of seemingly uncontrolled growth, with assets doubling sevenfold between 2012 and 2018, Huarong created its own banking, brokerage, insurance and rental weapons, along with a boost to property development.

Ronald Thompson, CEO of Alvarez & Marsal Asia, said bad debt managers have become “financial supermarkets” at a time when the country’s financial system is growing rapidly.

Huarong’s expansion beyond his initial duties was driven in part by the fact that taking on the company’s problem debts led to the acquisition of property stakes in the business.

“No. [in] In the US, we would have high-yield lenders, we would have high-yield bonds, we would have private equity agents; asset management companies have partially fulfilled that role in China, ”Thompson said.

“If you’re the boss of an AMC [asset management company] and your future is set to close next year as it was initially designed, ”he added,“ probably not good for morale ”.

In a statement to the Financial Times, Huarong said that since 2018, he has “decisively implemented the policies and decisions of the KPK Central Committee, State Council and regulatory authorities,” and “reoriented the core business of serious asset management.” .

With Huarong’s dollar debt trading at a serious level, a deep question for investors and regulators is where the reckless growth has left the group’s balance sheet.

The Beijing-based company had only half of its assets in the “overwhelmed” segment, according to the 2020 interim report released last August and the latest available data. The report cites other assets, including loans and debts to Chinese businesses.

Huarong International Holdings, the arm that issued the dollar’s ​​debt, had HK $ 198 billion in assets ($ 25.6 billion) in the first half of 2020, one-third less than in 2017, according to CreditSights. They included stocks, convertible bonds, structured products and over-the-counter derivatives.

While not very bright, Huarong’s foreign intentions – and those that dismantle them – echo HNA, Anbang and Dalian Wanda, a trio of privately owned Chinese conglomerates who were licensed to seek trophies around the world in 2018 before the government cracked down.

The HNA took years to break, as the creditors filed for bankruptcy only in January, after a court once ruled that the senior group was unable to pay its debts.

While Huarong is expected to play a key role in the Chinese mainland, especially if domestic credit conditions tighten further, the next move is in Beijing.

“They’re probably trying to guess what the hole is,” said a Hong Kong investor. “Once they figure out how big the hole is, they can make a decision on whether or not to overcome that gap.”