China Huarong Building in Hong Kong.
Fitch Ratings has downgraded its credit rating on China Huarong Asset Management Co. to the lowest investment grade. Fitch said the rating could be further downgraded if there are signs that the Communist government continues to support the troubled debt management company.
Fitch downgraded Huarong’s rating to BBB from A, a three-level cut, making it the first of the three major international rating agencies to downgrade Huarong, Bloomberg reported. The move comes after the state-owned company missed a deadline to report its 2020 results by March 31. Speculation about a possible debt restructuring at Huarong has shaken credit markets across Asia. Meanwhile, Communist Party officials and Huarong itself have provided little information about the company’s future fate.
Fitch said the lack of transparency could hamper Huarong’s ability to refinance its debt in offshore markets. The firm downgraded its rating on Huarong’s senior unsecured perpetual notes by four notches, from A- to BB+, and maintained a negative outlook on the perpetual notes and Huarong as a whole.
The downgrade of the perpetual notes to junk status underscores how quickly outside views of Huarong have changed. For much of the past few years, the company’s dollar-denominated bonds have traded near the face value of the notes. But the company’s dollar bonds fell sharply this month as investors questioned the Chinese Communist government’s backing of it. Communist government support has bolstered the credibility of state-owned borrowers for decades. Huarong, which is controlled by the Communist Party’s Ministry of Finance, is one of China’s most systemically important companies besides state-owned banks.
The rating agency said in a statement Monday (April 26), “Given China Huarong’s policy role and the potential contagion risk of similar policy-driven refinancing of government bonds, there may be a strong incentive for the government to continue to provide it with exceptional support. However, Fitch believes that signs of continued support have not yet become a reality.” Fitch added: “There is growing uncertainty about the company’s liquidity, particularly with respect to overseas financing.”
Data compiled by Bloomberg shows that Huarong currently has about $23.3 billion of outstanding overseas debt, of which $4.2 billion is due at the end of this year. The drama surrounding the company has effectively kept it out of the overseas public bond market and prompted investors to keep a close eye on the company’s maturity schedule for any possible signs of tightening liquidity at the firm.
On Sunday (April 25), Huarong announced that it would not announce its 2020 results before the end of this month – missing another deadline on the Hong Kong Stock Exchange and leading to another sell-off in the company’s bonds. The company issued a brief statement in Chinese, which mostly reiterated its earlier statement. There was no indication of when the results would be announced or whether anything had changed since the April 1 filing with the stock exchange. Huarong shares were still trading on the stock exchange before the suspension earlier in the month.
Moody’s Investors Service and Standard & Poor’s Global Ratings may also downgrade Huarong’s rating.
It is expected that Fitch’s downgrade will put further pressure on Huarong’s bonds.
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