China Huarong Asset Management Co. Ltd. (China Huarong) is approaching a deadline with high importance to offshore bond investors. The state-owned distressed asset manager has yet to disclose its 2020 results due to a "relevant transaction". Its subsidiary China Huarong International Holdings Ltd. (Huarong International) is also delaying its results pending this release by its parent.
If Huarong International fails to deliver the results by the deadline stipulated in the bond terms, it will be in technical default. S&P Global Ratings believes such an event could hit bond investors' confidence in other Chinese financial institutions. Investors' concerns are reflected in the quoted levels of Huarong International's guaranteed bonds, which have been trading at a significant discount.
We recently kept our 'BBB+' long-term and 'A-2' short-term ratings on all Huarong entities on CreditWatch with negative implications (see "China Huarong Asset Management And Subsidiaries Remain On CreditWatch Negative," published June 2, 2021 on RatingsDirect).
Investors have asked us questions relating to the CreditWatch and other related topics, the most frequent of which are listed below.
Frequently Asked Questions
What does China Huarong's situation say about government support for China's state-owned asset managers? Is there a possibility of contagion?
We see China's big four asset managers as government-related entities with very high levels of support from the state. The entities buy distressed debt, which helps banks and nonbanks to manage their nonperforming loans. They act as a financial stabilizer when there are troubled financial institutions to manage.
The entities, in other words, play an important policy role, and would likely receive government support if needed. This, in our view, would include China Huarong.
We consider both the stand-alone credit profile and government support in our rating construction for China Huarong. The entity was the biggest buyer of onshore distressed assets over the past three years. At this stage, we do not believe China Huarong's financial standing has deteriorated to a point where it may not be able to carry out its policy roles.
Do you think Huarong International will receive government support?
As a core subsidiary, Huarong International would benefit indirectly from any government support extended to China Huarong.
If Huarong International deviated from its core business--distressed asset management--or its profitability became excessively weak, it could lose its status as core subsidiary. In which case it may not enjoy the full benefits of group support.
For now, we anticipate such support would be forthcoming. The rating on Huarong International is a reflection of the expected group support, and not a reflection of the company's own stand-alone credit profile.
If the indirect flow of extraordinary government support were not forthcoming, we would reassess the support for Huarong's offshore subsidiaries. Depending on how these potentially negative scenarios play out, we could also take another look at the offshore subsidiaries of other asset management companies and other financial institutions. This may conceivably also prompt reconsideration of state support for the offshore subsidiaries of other Chinese government-related entities.
How likely is it that the government will step in?
Huarong International has settled about US$730 million of offshore bond principal since the group delayed its 2020 result announcement.
The Chinese government will likely manage the current uncertainties, to prevent them from triggering systemic instability. However, the government might not take action before it is absolutely necessary, because it also wants to enforce market discipline.
The government is likely reluctant to reinforce expectations that it provides blanket state support for state owned enterprises. Doing so could reinforce moral hazard, a persistent and pronounced issue for China's financial markets. Authorities must balance the sometimes competing priorities of maintaining market discipline and financial stability. The uncertainty of how this plays out is the key risk facing Huarong and China's other government related entities.
When will China Huarong release its results? What are the main issues to watch for?
In our base case we assume China Huarong's audited 2020 results will be released in time to avoid triggering an event of default.
The deadline would be end-August 2021 assuming the trustee or noteholders make a request for financial statement promptly after the 180-day waiting period.
This affects Huarong International, as it cannot release its results until the parent does. We believe this is because Huarong International has a connection to China Huarong's relevant transaction.
If Huarong International's financials are not provided, the offering circular of its guaranteed bond stipulates a maximum 60 days' grace period from the date when the trustee or noteholders holding at least 25% of the outstanding bonds can demand the financials. They can only make this demand 180 days after the end of the reporting period. This means the trustee or noteholders can demand the results by about the end of June 2021, giving the issuer until about the end of August 2021 to comply.
Failure to provide financials within this period (the 180 days plus the 60-day grace period from date of demand by the trustee or noteholders) could be a technical default. We note that the trustee or noteholders may not demand the financials immediately after that 180-day period. However, we nevertheless believe that China Huarong is working to get its results out by end-August 2021.
How do you reflect restructuring risk and the discount in the quoted price of China Huarong bonds in your ratings on China Huarong?
For our ratings, a default occurs when an issuer is not able to pay its obligations on time and in full. While a bond restructuring with a principal haircut would be viewed as a default, bond price movement by itself is not an event of default.
Offshore bonds have shown substantial price volatility since China Huarong's results were delayed. While we assess any potential rating effect based on credit fundamentals, market indicators help us gauge the confidence and reputation risk associated with this occurrence.
In the event of an exchange offer, we would also consider bond price discounts among other factors in assessing whether the exchange was distressed (see "S&P Global Ratings Definitions," Jan. 5, 2021).
We also note some of China Huarong's onshore senior unsecured bonds have been traded at a discount, though trading volume is low and the price levels are not as meaningful as they otherwise would be.
How do keepwell guarantees factor into your rating construction?
We acknowledge the existence of keepwells and consider it as a part of the overall supportive attitude of the parent. However, we do not treat keepwells as a valid rating substitution. Recent default events in China, such as that of Peking University Founder Group Co. Ltd. (PUFG), highlights both the structural-subordination and regulatory risks for offshore bonds under these structures (see "A Surprise Test For China Offshore Bonds With Keepwell Deeds," May 26, 2020)
- China Huarong Asset Management And Subsidiaries Remain On CreditWatch Negative, June 2, 2021
- China's Bond Market: As Governance Improves, Foreign Entry Could Grow, May 24, 2021
- Huarong Flags China Transparency And State Support Risks, April 21, 2021
- China Huarong Asset Management, Subsidiaries Placed On CreditWatch Negative Following Delayed Results, April 9, 2021
- A Surprise Test For China Offshore Bonds With Keepwell Deeds, May 26, 2020
Editing: Jasper Moiseiwitsch
This report does not constitute a rating action.
|Primary Credit Analysts:||Manqi Xie, CFA, Hong Kong + 85225328001;|
|Harry Hu, CFA, Hong Kong + 852 2533 3571;|
|Secondary Contacts:||Robert Xu, Hong Kong + 852 2532 8093;|
|Ming Tan, CFA, Singapore + 6562161095;|
|Media Contact:||Ning Ma, Hong Kong (852) 2912-3029;|
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