Huarong Asset Management, China’s largest troubled debt investor, suffered its first downgrading of its credit rating by an international agency a few weeks after a sharp sell-off of the group’s bonds under pressure.
The company, which is majority-owned by China’s Ministry of Finance and owes around $ 22 billion in dollar-denominated debt, has come under scrutiny as it repeatedly delayed the release of its 2020 financial results. .
On Monday evening, Fitch Ratings downgraded Huarong’s issuer rating from A to triple B, its lowest investment grade step and a notch above junk status. The agency said it “believes the indication of support from the government sponsor has not been so obvious” a day after Huarong, which has assets of around 1.7 billion rmb (262 billion rmb dollars), has confirmed it will miss a second reporting deadline at the end of April. .
Uncertainty over Huarong’s financial health was also exacerbated by the execution of its former president, Lai Xiaomin, in January for crimes including bigamy and abuse of power to grant credits.
The delay in results, along with reports of a potential restructuring, caused the prices of Huarong’s bonds to drop sharply and forced investors to reassess the likelihood of government support for the company and other related Chinese issuers. to the government in international debt markets.
Huarong said the reporting deadline was necessary in order to complete a transaction, without giving details. This explanation raised concerns about the quality of its assets and the business activities of former President Lai.
Huarong’s shares have been suspended in Hong Kong since the start of April and trading in its bonds has been volatile. On Tuesday, a Huarong bond maturing in 2022 was trading at 85 cents on the dollar, above the low of 67 cents in mid-April.
The company has become a focal point for broader discussions about Beijing’s support for its companies in offshore bond markets, as well as the health of China’s financial system. Brad Tank, director of fixed income investments at Neuberger Berman, said in a memo that the government was likely to “prepare for a soft landing.”
“As a huge owner of distressed assets in the heart of an economy likely to see an increase in NPLs over the next few months, we believe Huarong’s political importance is too high for the government to let the slightest doubt about its stability. ,” he added.
Huarong is one of four bad debt managers trained as part of the cleanup of the Chinese banking system following the Asian financial crisis of the 1990s. It has since evolved into a sprawling financial conglomerate with a range of subsidiaries.
Other western rating agencies have issued warnings on Huarong in recent weeks, but halted before a downgrade.
This month, China Chengxin Credit changed Huarong’s outlook to “negative,” citing concerns about declining profitability and high debt levels, but retained a triple A rating for the company.