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

Since our last China Credit Chronicle (CCC) on 28-April, the sentiment on high-yield credits in China has not improved, to say the least. The “3 Red Lines” requirements on Chinese property developers are proven to be a bit too draconian, in our view. The strict rule forced Chinese property developers to cut prices and may have incentivized a few to manipulate their balance sheets to lower their debt levels, in our judgment. The latest spotlight is on <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> (China Evergrande Group) of which we are working on the updated report to capture additional information once the information from the group is sufficient to form a judgment.
In this flash note, we update recent events of <a href="https://www.smartkarma.com/entities/hna-group-co-ltd" target="_blank" data-smartkarma-citation="entities:25987:1" rel="noopener">HNA Group (HNAGRZ CH)</a>(HNA) on its on-going bankruptcy procedure. HNA-related bonds have not been active of late on a lack of liquidity and recent updates from the group. We believe it is impossible at this stage to gauge the recovery rate of the HNA complex on its hidden liabilities and potential frauds evidenced by the embezzlement cases this year.
At 29 cents on the dollar (ask), we are not confident to recommend a Buy on the maturing SANYPH 10/21s without additional knowledge on the restructuring plan, but we believe the market prices HNA’s recovery around 12 cents on the dollar, based on HONAIR Perp’s bid price.
At the end of the day, HNA shows us that these Chinese mega corporates (i.e. <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> and China Evergrande Group) have enticed international investors (and perhaps rating agencies) to ignore credit fundamentals and believe they will be supported by the local and/or central government when necessary. Liquidity of these companies are all about credit facilities with Chinese banks, many of which are state-owned. Once the state support wanes, we believe the local bank credit facilities will be reduced and that could lead to an eventual default, in our view. We believe the fall of HNA and others to come is a necessary step of the learning curve for investors in Chinese credits although we do not believe the fallout will turn into a contagion for all Chinese high-yield credits.
That said, we believe investors need to learn how to price Chinese credits on a stand-alone basis properly, and rating agencies, especially Chinese rating agencies, need to adjust their rating models. In our opinion, wishful ratings at the issuances, followed by multiple and rush downgrades simply do not work and have left investors unprepared to sell bonds.

Since our last China Credit Chronicle (CCC) on 28-April, the sentiment on high-yield credits in China has not improved, to say the least. The “3 Red Lines” requirements on Chinese property developers are proven to be a bit too draconian, in our view. The strict rule forced Chinese property developers to cut prices and may have incentivized a few to manipulate their balance sheets to lower their debt levels, in our judgment. The latest spotlight is on Evergrande Real Estate Group (3333 HK) (China Evergrande Group) of which we are working on the updated report to capture additional information once the information from the group is sufficient to form a judgment.
In this flash note, we update recent events of HNA Group (HNAGRZ CH)(HNA) on its on-going bankruptcy procedure. HNA-related bonds have not been active of late on a lack of liquidity and recent updates from the group. We believe it is impossible at this stage to gauge the recovery rate of the HNA complex on its hidden liabilities and potential frauds evidenced by the embezzlement cases this year.
At 29 cents on the dollar (ask), we are not confident to recommend a Buy on the maturing SANYPH 10/21s without additional knowledge on the restructuring plan, but we believe the market prices HNA’s recovery around 12 cents on the dollar, based on HONAIR Perp’s bid price.
At the end of the day, HNA shows us that these Chinese mega corporates (i.e. China Huarong Asset Management (HUAZ CH) and China Evergrande Group) have enticed international investors (and perhaps rating agencies) to ignore credit fundamentals and believe they will be supported by the local and/or central government when necessary. Liquidity of these companies are all about credit facilities with Chinese banks, many of which are state-owned. Once the state support wanes, we believe the local bank credit facilities will be reduced and that could lead to an eventual default, in our view. We believe the fall of HNA and others to come is a necessary step of the learning curve for investors in Chinese credits although we do not believe the fallout will turn into a contagion for all Chinese high-yield credits.
That said, we believe investors need to learn how to price Chinese credits on a stand-alone basis properly, and rating agencies, especially Chinese rating agencies, need to adjust their rating models. In our opinion, wishful ratings at the issuances, followed by multiple and rush downgrades simply do not work and have left investors unprepared to sell bonds.

The China Credit Chronicle:  Hazardous National Anecdote

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

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China's largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and *Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China's largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and *Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.

China Huarong Asset Management – Preventing Another Daisy Chain

*Kick In The Pants: On July 21, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC] and many of the other major Hong Banks finally had the epiphany of declining mortgages to borrowers on two of Evergrande Group’s (3333.HK) residential developments in Hong Kong. On July 22, 2021, the Hong Kong Monetary Authority (HKMA) hauled HSBC and its colleagues in to explain the no lend decision on Evergrande’s two Hong Kong in process property  developments. Wouldn’t you know it, this subtle re-think request caused the banks to reverse course; and*Daisy Chain:This move by the HKMA and clearly prompted by authorities in mainland China intimates that Evergrande poses significant systemic risk for mainland China. Government officials in Shenyang are prompting SOEs to increase their ownership in Shengjing Bank (2966.HK), which is 36% owned by Evergrande and lent it an estimated USD 15.5 bn.

*Kick In The Pants: On July 21, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC] and many of the other major Hong Banks finally had the epiphany of declining mortgages to borrowers on two of Evergrande Group’s (3333.HK) residential developments in Hong Kong. On July 22, 2021, the Hong Kong Monetary Authority (HKMA) hauled HSBC and its colleagues in to explain the no lend decision on Evergrande’s two Hong Kong in process property  developments. Wouldn’t you know it, this subtle re-think request caused the banks to reverse course; and*Daisy Chain:This move by the HKMA and clearly prompted by authorities in mainland China intimates that Evergrande poses significant systemic risk for mainland China. Government officials in Shenyang are prompting SOEs to increase their ownership in Shengjing Bank (2966.HK), which is 36% owned by Evergrande and lent it an estimated USD 15.5 bn.    

HSBC Holdings Plc – Strong Armed By The HKMA

Thematic (Sector/Industry)

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

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.

China

China Huarong Asset Management Co., Ltd. operates as an investment management company. The Company offers financial services, asset management services, asset management services, and more. China Huarong Asset Management serves customers worldwide.

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China Huarong Asset Management (HUAZ CH)

The China Credit Chronicle: Hazardous National Anecdote

Here is an update on HNA, the recent fallout of more to come in the Chinese credit space. at 12c recovery, many factors remains uncertain....

Bondcritic

China Huarong Asset Management – Preventing Another Daisy Chain

CHINA HUARONG: Huarong still continues to teeter on the edge of insolvency. The USD 23.3 bn debt, however, still risks crippling the USD credit...

Thomas J. Monaco

HSBC Holdings Plc – Strong Armed By The HKMA

HSBC HOLDINGS: HSBC had an epiphany of declining mortgages on two of Evergrande’s local developments. The HKMA wanted an explanation and wouldn’t...

Thomas J. Monaco

China Banks – Screws Tighten On LGFVs

CHINA BANKS: Recently the CBIRC issued guidance on implicit LGFV debt via Document 15 – further tightening the screws on mainland China's financial...

Thomas J. Monaco

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

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