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

Here we summarize frequently asked questions (FAQ) we were asked in our recent press interviews during the past 2-3 weeks 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> or China Evergrande Group (Evergrande) and our prediction for the bondholders of the EVERRE complex.Our view is that Evergrande is never grand and those who have analyzed the company are not surprised on what happened. Rather, the crisis has involved from investors’ assumptions on Evergrande that evolved from presumption that the Chinese government will step in to support the company on the basis of systemic importance to the Chinese economy. The lesson from the Evergrande saga is similar to <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)’s where a presumption of government support should not be the assumption.The EVERRE complex prices have dropped to as low as 22 cents on the dollar. We understand there are distressed funds which will see the complex as attractive once the bonds are in the low 20s. However, we do not believe the market really knows the true recovery value of Evergrande based on its off-balance sheet liabilities and account payables, some of which should have been classified as debt. We then see bottom fishing in the 20s as a gamble and cannot recommend the bonds. As such, our UNDERWEIGHT recommendation on the EVERRE complex remains.

Here we summarize frequently asked questions (FAQ) we were asked in our recent press interviews during the past 2-3 weeks on Evergrande Real Estate Group (3333 HK) or China Evergrande Group (Evergrande) and our prediction for the bondholders of the EVERRE complex.Our view is that Evergrande is never grand and those who have analyzed the company are not surprised on what happened. Rather, the crisis has involved from investors’ assumptions on Evergrande that evolved from presumption that the Chinese government will step in to support the company on the basis of systemic importance to the Chinese economy. The lesson from the Evergrande saga is similar to HNA Group (HNAGRZ CH) (HNA)’s where a presumption of government support should not be the assumption.The EVERRE complex prices have dropped to as low as 22 cents on the dollar. We understand there are distressed funds which will see the complex as attractive once the bonds are in the low 20s. However, we do not believe the market really knows the true recovery value of Evergrande based on its off-balance sheet liabilities and account payables, some of which should have been classified as debt. We then see bottom fishing in the 20s as a gamble and cannot recommend the bonds. As such, our UNDERWEIGHT recommendation on the EVERRE complex remains.

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

Here, we have wrapped-up the recent fear on the Chinese debt bubble with our new periodical called “The Chinese Credit Chronicle (CCC)”. China is a bicycle economy which will fall down when the economy stops growing at a certain rate, in our view. We believe the minimum real GDP growth rate is c.5%. China’s real GDP growth was 2.3% in 2020, according to China’s National Bureau of Statistics. The 2.3% GDP growth achieved with the effective control of COVID-19 and without much government stimulus remains impressive, in our view, only if we believe this GDP growth is authentic.
Now comes the core of the problem. We have seen leverage in China being extended because of cheap funding costs rather than borrowers’ repayment capability.  Not to mention a shadow banking sector which the China Banking and Insurance Regulatory Commission (CBIRC) once estimated at RMB84.8trn in 2019 or 29% of total banking assets in 2019, leverage was injected officially into ineffective and poorly-managed borrowers such as local government financing vehicles (LGFV). In addition, with China’s urbanization, the demand for residential and commercial properties has risen in tandem with leverage of the Chinese property sector, hence concentrating the leverage in the sector.
Many market participants in China seem to have gambled that China’s growth music will continue playing and when loan growth continues, non-performing loans may not be a big problem. We believe the music has stopped and the Chinese government seems to have agreed with us.
Here, we have raised three anecdotes on the Chinese debt bubble and how we see the situation going this year: China Evergrande (<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> , <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> , and <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> .

Here, we have wrapped-up the recent fear on the Chinese debt bubble with our new periodical called “The Chinese Credit Chronicle (CCC)”. China is a bicycle economy which will fall down when the economy stops growing at a certain rate, in our view. We believe the minimum real GDP growth rate is c.5%. China’s real GDP growth was 2.3% in 2020, according to China’s National Bureau of Statistics. The 2.3% GDP growth achieved with the effective control of COVID-19 and without much government stimulus remains impressive, in our view, only if we believe this GDP growth is authentic.
Now comes the core of the problem. We have seen leverage in China being extended because of cheap funding costs rather than borrowers’ repayment capability.  Not to mention a shadow banking sector which the China Banking and Insurance Regulatory Commission (CBIRC) once estimated at RMB84.8trn in 2019 or 29% of total banking assets in 2019, leverage was injected officially into ineffective and poorly-managed borrowers such as local government financing vehicles (LGFV). In addition, with China’s urbanization, the demand for residential and commercial properties has risen in tandem with leverage of the Chinese property sector, hence concentrating the leverage in the sector.
Many market participants in China seem to have gambled that China’s growth music will continue playing and when loan growth continues, non-performing loans may not be a big problem. We believe the music has stopped and the Chinese government seems to have agreed with us.
Here, we have raised three anecdotes on the Chinese debt bubble and how we see the situation going this year: China Evergrande (Evergrande Real Estate Group (3333 HK) , HNA Group (HNAGRZ CH) , and China Huarong Asset Management (2799 HK) .

The Chinese Credit Chronicle: The CCC Danger

Last year, we saw the incoming of the Hainan Provincial Government to take control 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) and the potential sell-off HNA’s airline assets as spread positive for SANYPH 10/21s. The bonds rose to the high 70s before coming down to the high 40s in May on a series of negative headlines such as <a href="https://www.smartkarma.com/entities/hna-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29923:1" rel="noopener">HNA Technology Co Ltd (600751 CH)</a>’s default on a USD4bn loan from <a href="https://www.smartkarma.com/entities/agricultural-bank-of-china-limited" target="_blank" data-smartkarma-citation="entities:1120:1" rel="noopener">Agricultural Bank Of China (1288 HK)</a> to finance the USD6bn buyout of Ingram Micro in 2016. (HNA agreed to sell Ingram Micro to Platinum Equity, a US private equity firm, last December for USD7.2bn.)
Asset sales have slowed due to a COVID-19 impact on the valuation of travel-related assets but the effort was on-going with financial support from Chinese banks, especially <a href="https://www.smartkarma.com/entities/china-development-bank" target="_blank" data-smartkarma-citation="entities:28423:1" rel="noopener">China Development Bank (SDBZ CH)</a>. The bankruptcy notice on 29-Jan proved that asset sales, credit facilities, and new management set up by the provincial government are simply not sufficient to keep HNA afloat. Both SANYPH 10/21s and HONAIR Perp fell about 10 points on the bankruptcy news.
The most important piece of recent news on HNA is the CNY109bn embezzlement (and hidden debt guarantee) figure which appears to us as the tip of the iceberg.  COVID-19 and the corporate governance issues will make it difficult to conclude on HNA’s recovery value on its bonds. Hence, even at 30c on the dollar, we cannot recommend buying HNA-related bonds including both SANYPH 10/21s and HONAIR Perp.

Last year, we saw the incoming of the Hainan Provincial Government to take control of HNA Group (HNAGRZ CH) (HNA) and the potential sell-off HNA’s airline assets as spread positive for SANYPH 10/21s. The bonds rose to the high 70s before coming down to the high 40s in May on a series of negative headlines such as HNA Technology Co Ltd (600751 CH)’s default on a USD4bn loan from Agricultural Bank Of China (1288 HK) to finance the USD6bn buyout of Ingram Micro in 2016. (HNA agreed to sell Ingram Micro to Platinum Equity, a US private equity firm, last December for USD7.2bn.)
Asset sales have slowed due to a COVID-19 impact on the valuation of travel-related assets but the effort was on-going with financial support from Chinese banks, especially China Development Bank (SDBZ CH). The bankruptcy notice on 29-Jan proved that asset sales, credit facilities, and new management set up by the provincial government are simply not sufficient to keep HNA afloat. Both SANYPH 10/21s and HONAIR Perp fell about 10 points on the bankruptcy news.
The most important piece of recent news on HNA is the CNY109bn embezzlement (and hidden debt guarantee) figure which appears to us as the tip of the iceberg.  COVID-19 and the corporate governance issues will make it difficult to conclude on HNA’s recovery value on its bonds. Hence, even at 30c on the dollar, we cannot recommend buying HNA-related bonds including both SANYPH 10/21s and HONAIR Perp.

Our 20-Feb flash note put our recommendation on <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>'s SANYPH 21s under review on the Bloomberg news on 19-Feb that the Hainan Provincial Government is under discussion to take control of HNA Group Company Limited (HNA) and sell-off HNA’s airline assets. HNA’s senior management denied the talk existed, and that Bloomberg’s news was a rumor, according to China Business Daily on 20-Feb.
Over the past weekend, HNA’s management announced it would set-up a risk management committee to manage the company’s liquidity, in particular. The committee will comprise representatives from <a href="https://www.smartkarma.com/entities/china-development-bank" target="_blank" data-smartkarma-citation="entities:28423:1" rel="noopener">China Development Bank (SDBZ CH)</a>, Civil Aviation Administration of China (CAAC), and the Hainan Provincial Government.
According to South China Morning Post, HNA’s board of directors will appoint (1) Mr. Gu Gang, the Chairman of Hainan Development Holdings (HDH), as the group’s executive chairman and (2) Mr. Ren Qinghua, a director of the Hainan Yangpu Economic Development Zone (HYED), as a co-CEO, alongside the current CEO (Adam Tan). Both HDH and HYED are controlled by the Hainan Provincial Government.
Management said the change in board governance does not mean a takeover and/or a change of control. There are no other details on the acquisition or capital injection into HNA but we believe the event unfolding over the weekend tells us HNA’s potential default is now being taken more seriously by local and central governments.
And that seriousness has reduced HNA’s default probability, let alone cost of bankruptcy, for the group’s shareholders. We also believe the implementation of a government acquisition would be challenging as HNA's structure is complex. HNA has grown too fast and is too big that it needs to be broken down, and a restructuring of HNA could be best done under the state umbrella to ensure sufficient liquidity, in our view. The restructuring effort means bondholders need to pay more attention to a change of control and asset sales down the road as these two provisions could be triggered.
As we pointed out in our last flash note, the decision by the Hainan Provincial Government is not a surprise ( <a href="https://www.smartkarma.com/insights/hna-group-to-be-or-not-to-be-nationalized" target="_blank" data-smartkarma-citation="insights:36812" rel="noopener">HNA Group:  To Be or Not To Be (Nationalized)</a> ).

Our 20-Feb flash note put our recommendation on Hna Group (HNAGRZ CH)'s SANYPH 21s under review on the Bloomberg news on 19-Feb that the Hainan Provincial Government is under discussion to take control of HNA Group Company Limited (HNA) and sell-off HNA’s airline assets. HNA’s senior management denied the talk existed, and that Bloomberg’s news was a rumor, according to China Business Daily on 20-Feb.
Over the past weekend, HNA’s management announced it would set-up a risk management committee to manage the company’s liquidity, in particular. The committee will comprise representatives from China Development Bank (SDBZ CH), Civil Aviation Administration of China (CAAC), and the Hainan Provincial Government.
According to South China Morning Post, HNA’s board of directors will appoint (1) Mr. Gu Gang, the Chairman of Hainan Development Holdings (HDH), as the group’s executive chairman and (2) Mr. Ren Qinghua, a director of the Hainan Yangpu Economic Development Zone (HYED), as a co-CEO, alongside the current CEO (Adam Tan). Both HDH and HYED are controlled by the Hainan Provincial Government.
Management said the change in board governance does not mean a takeover and/or a change of control. There are no other details on the acquisition or capital injection into HNA but we believe the event unfolding over the weekend tells us HNA’s potential default is now being taken more seriously by local and central governments.
And that seriousness has reduced HNA’s default probability, let alone cost of bankruptcy, for the group’s shareholders. We also believe the implementation of a government acquisition would be challenging as HNA's structure is complex. HNA has grown too fast and is too big that it needs to be broken down, and a restructuring of HNA could be best done under the state umbrella to ensure sufficient liquidity, in our view. The restructuring effort means bondholders need to pay more attention to a change of control and asset sales down the road as these two provisions could be triggered.
As we pointed out in our last flash note, the decision by the Hainan Provincial Government is not a surprise ( HNA Group:  To Be or Not To Be (Nationalized) ).

China

HNA Group Co. Ltd. offers airlines services. The Company provides domestic and international aviation transportation, air travel, aviation maintenance, and aviation logistics services. HNA Group also operates holding, capital, tourism, logistics, and other business.

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HNA Group (HNAGRZ CH)

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