The mainland corporate debt crisis has worsened, with China Huarong (02799), one of the largest bad debt management companies and a major shareholder of the mainland Ministry of Finance, alarmed by rumors of bankruptcy triggering days of panic selling in the market. Although some major banks estimate that the central government will eventually come to the rescue, but Huarong’s debt problems have spilled over to the fish in the pond, Asian dollar bonds into the longest wave of decline since the outbreak of the epidemic, even Tencent Holdings (00700) was forced to delay the issuance of U.S. dollar debt plans.
The price of domestic and foreign debt issued by Huarong fell for several days in a row, hitting a new record low on Wednesday, with a 4.5 percent perpetual dollar bond falling 9.7 cents to 61.2 cents. Another investment grade (IG) domestic corporate bond “20 Huarong G1” (163373.SH) with an issue size of RMB 3 billion and an annual interest rate of 3.14% fell to RMB 86.48 per RMB 100 (the same below), and the yield climbed to 11.1624%, which is generally a high yield level for domestic real estate companies. The yield even climbed to 11.1624%, which is the general level of interest rate of high yield bonds issued by domestic real estate companies.
According to foreign media, Tencent is monitoring the market situation and still does not have a bond issuance schedule, in other words, the original plan to introduce the bond to market investors has been put on hold. In addition, the Barclays Index spread, which reflects China’s investment-grade U.S. dollar bonds, recorded the largest increase since March last year on Tuesday, due to the sharp drop in Huarong’s debt prices.
As the Ministry of Finance is the major shareholder of Huarong, the outside world is concerned about the mainland government’s latest attitude towards the debt of state-owned enterprises, as a number of local state-owned enterprises, such as Ziguang Group, Henan Yong Coal Power and Brilliance Group, have defaulted on their debts one after another at the end of last year, and even reorganized in bankruptcy, while the authorities have not “paid the bill” for enterprises with poor credit standing and poor operation as in the past. “.
However, two major international rating agencies, Moody’s and Fitch, have recently stepped in to downgrade Huarong’s rating and put it on the negative watch list. Fitch data also shows that last year, the amount of domestic bond defaults of state-owned enterprises up to 79.5 billion yuan, a record high scale, accounting for the overall scale of domestic bond defaults from 8.5% in 2019, a sharp increase to 57%. This ratio climbed further to 72% in the first quarter of this year.
But the investment bank Morgan Stanley but to the market to send “reassurance”, said Huarong is a systemically important financial institutions, believe that the mainland government will still provide support for it. The bank also cited reports that Huarong plans to divest non-core and loss-making businesses, and if the deal is reached, it will be able to avoid debt restructuring and government capital injection, so it does not expect Huarong to trigger systemic risks.
Another foreign media said that the Ministry of Finance is considering transferring its stake to Central Huijin, a sovereign wealth fund owned by China Investment Corporation, which has more experience in dealing with debt risks.
The interim report of Huarong last year, cited by DAMO, projected that its short-term financial burden amounted to 625 billion yuan, but Huarong has about 200 billion yuan of relative liquid assets, plus the authorities still provide Huarong with a stable financing base, Huarong is believed to be sufficient to cope with emergency liquid capital needs. With a face value of non-performing financial assets of 620 billion to 1.2 trillion yuan, Huarong’s short-term debt crisis may not be as serious as expected.
It is worth noting that the bank has shifted the pricing level of Huarong’s bonds from investment grade bonds to high yield bonds or distressed investment, which means that the market demand for Huarong’s bonds will take time to recover.
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