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China debt crunch

China's Huarong to miss second results deadline

Bonds slip as investors question financial health of bad debt manager

Analysts and investors believe the Chinese government would bail out bad debt manager Huarong if necessary to prevent a crisis in the nation's $50 trillion financial system.   © AP

HONG KONG -- China's largest distressed debt manager has announced it will miss another results disclosure deadline, further unsettling bond investors and raising fresh concerns over a potential default.

China Huarong Asset Management said on Sunday that it will not meet an end-of-April deadline for announcing its 2020 audited results as auditors need more time to finalize their inspection of an unspecified transaction.

The company, which is majority owned by the Ministry of Finance, earlier failed to disclose its preliminary results by March 31 as required by the Hong Kong stock exchange, sparking a sell-off of the company's bonds. The Hong Kong-traded shares have been suspended since April 1.

In its statement on Sunday Huarong reiterated that its operations are stable and all lines of business are running normally.

Despite this, the company's offshore bonds due in November 2025 are expected to dip below 80 cents to the dollar, according to one trader. Bonds due April 2022 meanwhile will likely fall to around 81 cents on the dollar, compared with 83.5 cents on Friday, the trader said.

Just last week, Huarong's offshore bonds rebounded from a low of 65 cents on the dollar on reports the company had arranged funds to redeem $451 million in bonds due on Tuesday. A statement by China's financial regulator that the company had ample liquidity also helped to soothe investor nerves.

The company's initial disclosure delay sparked a sell-off by bond investors already nervous about the financial health of the company.

Huarong has been under the microscope since 2018 when former Chairman Lai Xiaomin was arrested on corruption charges. The three major ratings agencies -- S&P Global Ratings, Moody's Investors Service and Fitch Ratings -- this month said they are reviewing the company for a potential downgrade.

"We believe the results delay may impede the group's access to offshore capital markets, so long as the situation remains unresolved," S&P Global Ratings financial institutions credit analyst Harry Hu said last week. "Huarong may need to rely on internal sources or other funding to meet its offshore liquidity needs over the coming months."

Huarong and its units have over $43 billion in bonds outstanding. More than half mature by the end of 2022, according to data compiled by Refinitiv.

Huarong had 1.73 trillion yuan ($264 billion) in assets and 1.37 trillion yuan in interest-bearing liabilities as of June 2020.

Its core business of buying and restructuring sour loans makes up only about half its total assets, with banking, securities trading, trusts and other investments management comprising the rest, according to its interim report.

Analysts and investors continue to believe the government would eventually bail out Huarong if needed to prevent a crisis across the nation's $50 trillion financial system.

China is considering a plan for the central bank to assume more than 100 billion yuan ($15.4 billion) of assets from Huarong to help the company clean up its balance sheet, Bloomberg reported last week.

Huarong was one of four big distressed debt managers set up by Chinese authorities in 1999 to help the nation's banks grapple with bad debts.

Most of the asset manager's troubles stem from the tenure of former Chairman Xiaomin, who used access to cheap funding to expand into unrelated businesses. He was found guilty of accepting bribes and bigamy and executed in January.

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