Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Credit

We highlighted <a href="https://www.smartkarma.com/entities/china-huarong-asset-management-26375cc4-728e-4f75-b058-64298b10f256" target="_blank" data-smartkarma-citation="entities:28089:1" rel="noopener">China Huarong Asset Management (HUAZ CH)</a> (Huarong) in our debut  “The Chinese Credit Chronicle (CCC)” last month on Huarong’s annual report delay. The subsequent events have stabilized Huarong’s HRINTH complex somewhat before the market fears Huarong’s debt could be restructured.
The rating downgrades by Fitch and Moody’s are less of an issue, in our view, as they are simply actions to catch up with what the market fears. Huarong’s story is less flamboyant than the HNA Group Limited (HNA) and yet it highlights the very same problem with HNA in terms of a lack of transparency and implicit support by the Chinese government. Both were eventually rescued by state-owned Chinese banks and both could be restructured down the road.
At the end of the day, we believe Huarong has been viewed as a quasi-sovereign credit and even rating agencies have been being caught by surprise as the market doubts support from the Chinese government will be certain. For Huarong, we still believe government support can be expected, but we believe the dust has not settled yet on the liabilities (and losses) that Huarong may have in store for bondholders. As a result, we cannot recommend buying Huarong’s HRINTH complex.
In a greater context, the risk we see here is that the rating agencies may revamp their methodologies to assess Chinese government-related entities (GREs). The adjustment could result in a wholesale downgrade of those GREs which are spread negative, not just for the Chinese GREs, but also other Chinese credits with implicit support from the central and local Chinese governments. We note that Chinese issuers have come a long way in terms of corporate governance improvement but transparency remains one of the key reasons why developed market USD bonds trade much tighter than Chinese USD bonds with the same rating, and this Huarong saga is a reminder that the spread will not narrow anytime in the near future.

We highlighted China Huarong Asset Management (HUAZ CH) (Huarong) in our debut  “The Chinese Credit Chronicle (CCC)” last month on Huarong’s annual report delay. The subsequent events have stabilized Huarong’s HRINTH complex somewhat before the market fears Huarong’s debt could be restructured.
The rating downgrades by Fitch and Moody’s are less of an issue, in our view, as they are simply actions to catch up with what the market fears. Huarong’s story is less flamboyant than the HNA Group Limited (HNA) and yet it highlights the very same problem with HNA in terms of a lack of transparency and implicit support by the Chinese government. Both were eventually rescued by state-owned Chinese banks and both could be restructured down the road.
At the end of the day, we believe Huarong has been viewed as a quasi-sovereign credit and even rating agencies have been being caught by surprise as the market doubts support from the Chinese government will be certain. For Huarong, we still believe government support can be expected, but we believe the dust has not settled yet on the liabilities (and losses) that Huarong may have in store for bondholders. As a result, we cannot recommend buying Huarong’s HRINTH complex.
In a greater context, the risk we see here is that the rating agencies may revamp their methodologies to assess Chinese government-related entities (GREs). The adjustment could result in a wholesale downgrade of those GREs which are spread negative, not just for the Chinese GREs, but also other Chinese credits with implicit support from the central and local Chinese governments. We note that Chinese issuers have come a long way in terms of corporate governance improvement but transparency remains one of the key reasons why developed market USD bonds trade much tighter than Chinese USD bonds with the same rating, and this Huarong saga is a reminder that the spread will not narrow anytime in the near future.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

China Huarong Asset Management / Equity Bottom-Up

*Already On Edge:  Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and *Another Audit Delay: Huarong is delaying its 2020 earnings results beyond the April 30, 2021 deadline, which, in our view, only exacerbates concerns over a potential Huarong default. Ironic, given that Huarong was supposed to help mainland China clean up its bad debt mess. This further delay will not help bond liquidity which already appears to have disappeared. Contagion risk remains a real threat as bondholders likely sell other holdings.

*Already On Edge:  Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and *Another Audit Delay: Huarong is delaying its 2020 earnings results beyond the April 30, 2021 deadline, which, in our view, only exacerbates concerns over a potential Huarong default. Ironic, given that Huarong was supposed to help mainland China clean up its bad debt mess. This further delay will not help bond liquidity which already appears to have disappeared. Contagion risk remains a real threat as bondholders likely sell other holdings.

China Huarong Asset Management  - This Can’t Be Good

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Uncertainty at <a href="https://www.smartkarma.com/entities/china-huarong-asset-manageme" target="_blank" data-smartkarma-citation="entities:28089:1" rel="noopener">China Huarong Asset Management (HUAZ CH)</a>, China’s largest distressed debt manager is causing ripples throughout Asia’s credit markets. More broadly, China’s <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> cancelled a US$4 billion bond sale due to market conditions. Specifically, Huarong contagion steepened the credit curve of China’s other asset management companies (AMCs).
At issue here are the Keepwell provisions which enable China’s banks, and non-bank finance companies to access foreign currency financing in the global bond markets. Essentially, a Keepwell provision is a pledge, not a guaranty, to keep an offshore subsidiary which issues the bonds solvent in the event of distress.
The immediate risk is that Huarong’s offshore issuance vehicles are not supported in any restructuring. Orphaning the Keepwell provisions would destroy an important component of AMC funding. The damage here would extend beyond AMCs to other non-bank finance companies, including leasing companies and other entities owned by China’s banks. Not supporting these securities could all but eliminate China Inc.’s access to the global bond markets.
Concurrently, price action in the bond market suggests concern with the long-term viability of the AMC model rather than jump to default risk. We are not convinced this is appropriate and recommend Overweighting other AMC bonds.
Although the former top executive was put to death, Huarong bondholders need not be. Nonetheless, the walk to the gallows can be harrowing and uncertainty is high. There is likely more than meets the eye in this story. It is conceivable that we never see a 2020 year-end report for this state-owned enterprise. Therefore, having a strong conviction on Huarong means undertaking a leap of faith. As such, we suggest a way to trade Huarong  such that downside is limited; however, our preference is to trade the contagion.

Uncertainty at China Huarong Asset Management (HUAZ CH), China’s largest distressed debt manager is causing ripples throughout Asia’s credit markets. More broadly, China’s Tencent Holdings (700 HK) cancelled a US$4 billion bond sale due to market conditions. Specifically, Huarong contagion steepened the credit curve of China’s other asset management companies (AMCs).
At issue here are the Keepwell provisions which enable China’s banks, and non-bank finance companies to access foreign currency financing in the global bond markets. Essentially, a Keepwell provision is a pledge, not a guaranty, to keep an offshore subsidiary which issues the bonds solvent in the event of distress.
The immediate risk is that Huarong’s offshore issuance vehicles are not supported in any restructuring. Orphaning the Keepwell provisions would destroy an important component of AMC funding. The damage here would extend beyond AMCs to other non-bank finance companies, including leasing companies and other entities owned by China’s banks. Not supporting these securities could all but eliminate China Inc.’s access to the global bond markets.
Concurrently, price action in the bond market suggests concern with the long-term viability of the AMC model rather than jump to default risk. We are not convinced this is appropriate and recommend Overweighting other AMC bonds.
Although the former top executive was put to death, Huarong bondholders need not be. Nonetheless, the walk to the gallows can be harrowing and uncertainty is high. There is likely more than meets the eye in this story. It is conceivable that we never see a 2020 year-end report for this state-owned enterprise. Therefore, having a strong conviction on Huarong means undertaking a leap of faith. As such, we suggest a way to trade Huarong  such that downside is limited; however, our preference is to trade the contagion.

China Huarong: Contagion Creates Opportunity

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

The irony.
<a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">China Huarong Asset Management (2799 HK)</a> was originally set up in 1999 by Beijing, in response to the Asian financial crisis,  to bail out a State-owned bank - ICBC - before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong.
The bailer becomes the bailee?
Huarong's woes are not new. Its chairman, Lai Xiaomin was placed under investigation for graft in April 2018, following which he resigned for "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0420/ltn20180420033.pdf" target="_blank" rel="noopener">personal reasons</a>". 
Shortly after, Hong Kong's SFC froze HK$10.17bn of assets in three brokers - this amount is the loss incurred by Huarong. In the SFC's words, a certain person "orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company [Huarong] or its subsidiaries in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company".
Fast forward to the 29 January this year wherein Lai Xiaomin was <a href="https://www.reuters.com/article/us-china-huarong-lai/former-china-huarong-chairman-executed-after-bribery-conviction-idUSKBN29Y1P2" target="_blank" rel="noopener">executed</a> in what Bloomberg (perhaps) sardonically concluded was an unusually harsh sentence for a bribery conviction. 
Huarong has been <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0401/2021033101720.pdf" target="_blank" rel="noopener">suspended</a> since the 1 April 2021 after failing to despatch its 2020 annual report. In Hong Kong, companies are afforded three months from year-end to do so.
Huarong is not alone - at least 50 Hong Kong-listed companies have failed to report earnings on the March 31 deadline. Last year, 384 Hong Kong companies did not publish annual results by March 31, but were able to continue trading after the exchange and markets regulator relaxed the rules due to the pandemic. This year there was no such arrangement.
But Huarong has come under pressure following a commentary from Caixin Media of a possible bankruptcy. In a commentary dated on Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy. “As of mid-2020, Huarong had 160 billion yuan [$20 billion] in net assets, and more than 30 billion yuan in loan-loss provisions,” she wrote “Huarong needs to be thoroughly recapitalised and have the value of its nonperforming assets correctly recalculated. It needs to take a big bath."
The yield on Huarong's US$300mn 3.375% bond due May 2022 has blown out to 23%. 
This has all the hallmarks of the <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> situation in September last year covered by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a> in <a href="https://skr.ma/UvXgU" target="_blank" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>.
The equity here, as might be expected, is the riskier option if the company goes bust. Yet a systematic restructuring process is a more likely outcome here.
Creditors are also often protected but this situation will test both state support of an SOE and how keepwell agreements are treated. The offshore bonds at ~70c look interesting.

The irony.
China Huarong Asset Management (2799 HK) was originally set up in 1999 by Beijing, in response to the Asian financial crisis,  to bail out a State-owned bank - ICBC - before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong.
The bailer becomes the bailee?
Huarong's woes are not new. Its chairman, Lai Xiaomin was placed under investigation for graft in April 2018, following which he resigned for "personal reasons". 
Shortly after, Hong Kong's SFC froze HK$10.17bn of assets in three brokers - this amount is the loss incurred by Huarong. In the SFC's words, a certain person "orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company [Huarong] or its subsidiaries in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company".
Fast forward to the 29 January this year wherein Lai Xiaomin was executed in what Bloomberg (perhaps) sardonically concluded was an unusually harsh sentence for a bribery conviction. 
Huarong has been suspended since the 1 April 2021 after failing to despatch its 2020 annual report. In Hong Kong, companies are afforded three months from year-end to do so.
Huarong is not alone - at least 50 Hong Kong-listed companies have failed to report earnings on the March 31 deadline. Last year, 384 Hong Kong companies did not publish annual results by March 31, but were able to continue trading after the exchange and markets regulator relaxed the rules due to the pandemic. This year there was no such arrangement.
But Huarong has come under pressure following a commentary from Caixin Media of a possible bankruptcy. In a commentary dated on Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy. “As of mid-2020, Huarong had 160 billion yuan [$20 billion] in net assets, and more than 30 billion yuan in loan-loss provisions,” she wrote “Huarong needs to be thoroughly recapitalised and have the value of its nonperforming assets correctly recalculated. It needs to take a big bath."
The yield on Huarong's US$300mn 3.375% bond due May 2022 has blown out to 23%. 
This has all the hallmarks of the Evergrande Real Estate Group (3333 HK) situation in September last year covered by Travis Lundy in Evergrande May Be Facing a Funding Squeeze.
The equity here, as might be expected, is the riskier option if the company goes bust. Yet a systematic restructuring process is a more likely outcome here.
Creditors are also often protected but this situation will test both state support of an SOE and how keepwell agreements are treated. The offshore bonds at ~70c look interesting.

China Huarong Asset Management (2799 HK): This Is Manageable

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

China

China Cinda Asset Management Company Ltd. provides asset management services. The Company invests, disposes, and manages non-performing assets and equity. China Cinda Asset Management also provides consulting, investment, financial, and risk management services to individuals and businesses.

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China Cinda Asset Management (1359 HK)

China Huarong: No Confidence Motion

China Huarong could be the first domino to fall on the confidence on the implicit support by the Chinese government. Rating agencies' scramble to...

Bondcritic

China Huarong Asset Management - This Can’t Be Good

CHINA HUARONG ASSET MANAGEMENT: Huarong is delaying its 2020 earnings results beyond the April 30, 2021 deadline, which, in our view, only...

Thomas J. Monaco

China Huarong: Contagion Creates Opportunity

Trade the contagion from China Huarong uncertainty. Although the former top executive was put to death, bondholders need not be. However, having a...

Hank Calenti, CFA

China Huarong Asset Management (2799 HK): This Is Manageable

With the benefit of the restructuring of Boashang, Anbang, and Evergrown Bank, China has developed a mature process to address a situation such as...

David Blennerhassett

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

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