China's distressed asset managers will continue to sell their noncore businesses to reduce their leverage after the biggest bad bank in the country needed a state-led rescue this year to prevent possible contagion effects on the financial system, S&P Global Ratings analysts said.
Uncertainties linger over the recapitalization and asset disposal plan of China Huarong Asset Management Co. Ltd. despite support from the government, as asset managers face intense competition from each other, Ratings analysts said at a Sept. 14 webinar. After years of rapid expansion, the four biggest Chinese distressed asset managers — Huarong, China Great Wall Asset Management Co. Ltd., China Orient Asset Management Co. Ltd. and China Cinda Asset Management Co. Ltd. — have sought to return closer to their core business since 2018, the agency said.
"We believe that the deleveraging and disposal of noncore assets is still likely to continue at least in the near future. They still play an important role as a financial stabilizer," said Ratings analyst Phyllis Liu.
China now has nearly 60 local asset managers across the country. While the four largest asset management companies still dominate the distressed asset market of the country, their total share of the market has been gradually falling over the years. Many, including Huarong, were unable to keep their borrowing in check and found themselves unable to service their debt as the COVID-19 pandemic roiled the economy. The supply of stressed assets has increased due to the pandemic, which may further intensify competition and threaten the position of the biggest players.
The rating agency revised its outlook to negative from stable for both Great Wall and Orient Asset on Aug. 20. On Sept. 9, the agency lowered its long-term issuer credit ratings on Huarong and its units by one notch to BBB from BBB+ and said its outlook on the company's ratings stays negative.
Asset quality concerns
"The company's asset quality will remain weak in the next two years. The negative outlook reflects our view that the group's leverage is still under pressure given uncertainty over its recapitalization and asset disposal plan in addition to falling industry barriers for entry to the distressed asset management sector in China," Liu said.
Huarong became a test case for China's state-owned distressed asset management firms after the company delayed its 2020 earnings report by about five months. It reported a net loss of 106 billion yuan for the year in August. The company is now awaiting a capital injection from five central government-owned strategic investors led by CITIC Group Corp. announced in August, though Ratings warned that the group could face further downgrades if it fails to meet the regulatory capital requirements or if competition intensifies further.
"Huarong's asset base is eroded significantly after a substantial loss in 2020. However, in our base case assumption, we expect Huarong will meet the regulatory capital requirement after the capital injection from strategic investors within 12 months," Liu said.
Huarong reported a capital adequacy ratio of 6.32% for the first half of 2021, below the 12.5% required by regulators. Liu said in a base case scenario, the company will need an additional 45 billion yuan to 55 billion yuan to fill the capital shortfall, though uncertainties remain over its plans to generate fresh capital from strategic investors and through the divestment of non-core assets.
As of Sept. 13, US$1 was equivalent to 6.45 yuan.
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