SOVEREIGN DEBT RESTRUCTURING | MASTERCLASS

A deep dive masterclass on sovereign debt restructuring, to be conducted virtually by Asian high yield bond expert Florian Schmidt.

30 June 2022 (Thu), 5pm Singapore/HK time

China Huarong Asset Management Co Ltd finally published results for the full year ended December 30, 2020 and the interim results for the six months ended June 30 on Sunday. The distressed asset manager reported a loss of RMB 102.9bn ($15.9bn) for 2020, in line with guidance given a few weeks ago. The loss was on the back of massive impairments of RMB 107.8bn ($16.67bn) and loss on financial assets of RMB 12.5bn ($1.93bn). The loss led to its shareholder equity being slashed by ~85%, as per Bloomberg. Huarong’s leverage ratio (interest bearing debt to equity) spiked to a massive 1,333x and its capital adequacy ratio (capital to risk-weighted assets) fell to 4.16% as at end 2020. In the first six months of this year, Huarong made some progress in improving its financial position with a 1H profit of RMB 1.624bn ($251mn). Its leverage ratio and capital adequacy stood at 37.1x and 6.32% as of June 30. As per Bloomberg, Chinese regulators require distressed asset managers to have a minimum capital adequacy of 12.5% and a minimum core tier-1 ratio of 9%. Chairman Wang Zhanfeng called 2020 “a harsh lesson to be learned in the development history of the company,” adding, “What is gone is gone, but go for what to come. We will learn from the lesson and take it as valuable experience and the desire to move forward.” The company said that it plans to offload non-core subsidiaries in the near future to increase cash flows and boost its capital position, but further details were lacking.

This comes a few weeks after Huarong broke its silence on its financial position and future plans, which remained uncertain since March this year when the company failed to publish 2020 annual results. The company will receive a state-led bailout with a $7.7bn capital infusion by major state-backed companies including Citic Group, China Insurance Investment Co and China Life Asset Management Co. Rating agencies have given a mixed reaction with Moody’s downgrading it by a notch to Baa2 while keeping its rating on review for downgrade on August 23, S&P keeping Huarong’s BBB+ rating on credit watch negative on August 20 and Fitch revising its rating watch on the company’s BBB rating to positive from negative.
Huarong’s bonds have traded higher in the days leading up to the announcement, made on August 18, with its 3.25% 2024s up from ~73 at the start of the month to currently trade at 94.4 cents on the dollar. Most of its other bonds saw a similar move with its 3.375% 2030s up ~25 points month-to-date (MTD) to 89 cents on the dollar.
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