Huarong says there is no change in state support, ready to repay debt

(Bloomberg) – China Huarong Asset Management Co. has said it is ready to make future bond payments and has seen no change in the level of support it receives from the Chinese government, aimed at allaying concerns investors after local media reported that regulators backed down from the company’s restructuring plan.

“At this time, there is no factual basis to indicate a change in shareholding structure or ownership control, nor any evidence indicating a change in support the company receives from the government,” Beijing-based Huarong said in response to questions. from Bloomberg Thursday. The company said its liquidity situation was “good” and that it had made “appropriate arrangements” and “adequate preparation” for future bond payments.

Huarong’s bonds sank on Wednesday after Caixin Media’s WeNews reported that the troubled state-owned debt manager was urged by regulators to solve his financial problems on his own. The company has been instructed to return to its core business and divest some country units in order to reduce its capital requirements, WeNews reported. An official at rival China Great Wall Asset Management Co. is expected to be named Huarong’s new chairman, the outlet said.

The WeNews report ended a period of relative calm for Huarong bonds, which initially fell in April after the company missed a deadline to release 2020 results. Bonds continue to trade at tense levels , even after Huarong repaid the maturing notes on time and the Chinese banking regulator said the company had sufficient liquidity. Some analysts said Huarong’s lack of market contagion could embolden authorities to limit support for the company.

Huarong did not comment on Thursday whether regulators support his restructuring proposal or whether he can release 2020 financial statements in the second quarter.

The company’s dollar bonds cut some of their morning losses. The 4% perpetual dollar note was down 0.5 cents against the dollar at 62.7 cents, according to data compiled by Bloomberg.

“We are still waiting for state support for Huarong, but it may not be a blank check bailout as the government seeks to balance the great risk of contagion against promoting market discipline. for public companies, ”said Dan Wang, credit analyst at Bloomberg Intelligence. “A bailout without a haircut for bondholders, in which Beijing would only have to pay about 60 billion yuan, is possible. But the lack of transparency means that a much larger infusion of capital might be needed, and that could well involve haircuts. “

Read more: Shape of Huarong’s resolution in China could depend on its size

The Chinese government has so far been silent on Huarong’s fate. Defaults at state-backed companies have increased in recent years, as President Xi Jinping reduced his support for weaker borrowers to reduce moral hazard, although none of the borrowers who defaulted was not as systemically important as Huarong.

The company owes domestic and international bondholders the equivalent of around $ 41 billion and ranks among China’s largest issuers in offshore markets. It is majority owned by China’s Ministry of Finance and is closely linked to the country’s $ 54 trillion financial industry. Any default would shatter a long-held assumption that the government will always step in to help large state-owned enterprises in times of difficulty.

Huarong drafted a proposal to offload unprofitable and non-core businesses while avoiding the need for debt restructuring, Bloomberg News reported earlier. The plan would require approval from Chinese regulators.

Authorities are also reportedly considering a proposal to transfer more than 100 billion yuan ($ 15.5 billion) in assets from Huarong to a unit of the Chinese central bank. Meanwhile, the finance ministry plans to transfer its stake to a unit of the country’s sovereign wealth fund, which has more experience in resolving debt risks.

Fitch Ratings and Moody’s Investors Service downgraded Huarong’s rating at the end of April, highlighting a lack of clarity on the extent of Beijing’s support.

Xu Yongli, vice president and secretary of the company’s board of directors, told the Shanghai Securities News on April 30 that the downgrades “had no factual basis” and were “too pessimistic.” Xu said there was no evidence indicating a change in his ownership structure, nor any sign of a change in the level of government support.

(Add today’s trading and analyst commentary in the sixth and seventh paragraphs.)

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