Pressure is mounting to resolve the fate of Chinese bad debt manager Huarong

Six months after its president Lai Xiaomin was found guilty of corruption and executed, the fate of Huarong Asset Management, China’s top bad debt manager, is unclear and Beijing’s stakes are rising.

One of four state-owned asset management companies set up in 1999 to clear the debts of the banking sector after the Asian financial crisis, the convulsion in Huarong has intensified since Lai’s death.

The failure to publish its financial accounts for 2020 and the uncertainty about the rmb1.7tn ($ 261 billion) of assets on its balance sheet have led to wild changes in the $ 22 billion in dollar-denominated bonds that the group sold to international investors.

The prospect of maturing $ 100 billion in Chinese corporate debt this year is injecting more urgency into resolving the future of a group that over the past decade has left its roots as a firm administrator of bad debts.

“We don’t expect it, but if Huarong’s situation results in a default, what will that say about government support for other publicly owned entities?” said Charles Chang, director of the S&P rating agency. “If it turns out that there is a breach or a restructuring, we will have to take a look at them all [of them]”.

Concerns over Beijing’s approach to the companies it created to manage bad debts and troubled loans in China widened this month after authorities opened an investigation to Hu Xiaogang, vice president of China Great Wall Asset Management and former executive of China Orient Asset Management.

The Great Wall and the East, along with Cinda and Huarong, form the quartet of bad debt managers. As with the bad banks established in Spain and Ireland after the eurozone crisis, their goal was to take out troubled loans from the banking system, a function still important in China’s financial system.

But instead of downsizing as memories of the Asian crisis faded, asset managers embarked on a freewheeling expansion that saw the four get more than $ 100 billion in debt markets. between 2013 and 2018.

They all looked beyond China, but Huarong was by far the most aggressive. In 2015 alone, its international assets increased by more than 300%, according to S&P. In that year, it listed part of its business in Hong Kong following the strategic investments of Goldman Sachs and Warburg Pincus.

The firepower of Huarong’s overseas activity, which the company has since blamed Lai for, came in large part from the $ 22 billion in dollars raised by its international arm.

“During the former president’s tenure, Huarong expanded into many business lines that were unrelated to his core tenure in troubled debt management,” said Jason Tan, an analyst at CreditSights. This “eventually caused the chair to fall and a calculation for the company.”

Huarong’s overseas investments helped Chinese companies gain access to credit beyond the mainland. One example was the purchase of the 2016 dollar debt sold by China Aluminum, one of the world’s largest metal producers and not a financially affected company. Chinese companies often issue dollar-denominated bonds through Hong Kong, outside the country’s domestic financial markets, to take advantage of international investor demand.

He also bought bonds sold by Country Garden, a private real estate developer that has become one of China’s best-known real estate companies in a sector that is now under pressure from Beijing to reduce its debts. In 2017, Huarong also helped developer Zhonghong Holdings buy one $ 449 million stake in US amusement park operator Seaworld Entertainment.

In a period of seemingly uncontrolled growth, which saw its assets multiply by seven between 2012 and 2018, Huarong established its own banking, intermediation, insurance and leasing weapons, along with a boost to real estate development.

Ronald Thompson, CEO of Alvarez and Marsal Asia, said bad debt managers were transformed into “financial supermarkets” at a time when the country’s financial system was growing rapidly.

Huarong’s own expansion beyond its initial competencies was fueled in part because taking on a company’s troubled debts ended up causing it to participate in the companies.

“On [in] in the US, we would have high-yield lenders, we would have high-yield bonds, we would have private equity players, asset management companies have partially played that role in China, ”Thompson said.

“If you are the head of an AMC [asset management company] and your future is to close it next year as it was originally designed, “he added,” probably not good for morale. “

In a statement to the Financial Times, Huarong said that since 2018 he had “decisively implemented the policies and decisions of the CCP Central Committee, the State Council and the regulatory authorities” and that he had “focused again on his main asset management business in difficulty “. .

As Huarong dollar debts trade at distressed levels, the urgent issue for investors and regulators is where reckless growth has left the group’s balance sheet.

The company, which is headquartered in Beijing, had only half of its assets in its “distressed” segment, according to the 2020 interim report released last August and the latest available data. The report refers to other assets, including loans and debts to Chinese companies.

Huarong International Holdings, the arm that issued dollar-denominated debt, had total assets of A $ 198 billion ($ 25.6 billion) during the first half of 2020, a third less than in 2017, according to CreditSights. They included stocks, convertible bonds, structured products and over-the-counter derivatives.

Although much less showy, Huarong’s overseas ambitions – and development – echo HNA, Anbang and Dalian Wanda, a trio of privately owned Chinese conglomerates licensed to search for trophy goods worldwide before a government crackdown in 2018.

HNA has taken years to complete, and creditors only filed for bankruptcy in January after a court ruled the highly flying group could not pay its debts.

While Huarong is expected to play a crucial role in mainland China, especially if domestic credit conditions tighten further, the next step is for Beijing.

“They’re probably trying to figure out what the hole is,” a Hong Kong investor said. “Once they find out how big the hole is, they can make a decision on whether or not they want to bridge that gap.”