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.

China Evergrande Group:   Trick Without Treat

The Chinese Credit Chronicle: The Below CCC Moment

HNA Group:  To Be or Not To Be (Nationalized)

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

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