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Huarong Shock Sends Dollar Bond Buyers to Names They Know Best

Rebecca Choong Wilkins
·3 min read

(Bloomberg) -- The market drama surrounding China Huarong Asset Management Co. is prompting investors to become more selective with their purchases of Chinese dollar bonds, exacerbating the divide between the most established issuers and the rest of the market.

Bank of China Ltd. units raised the equivalent of $2.35 billion in a multi-currency bond sale late Wednesday, with yield spreads on two dollar-denominated notes coming in tighter than recent comparable offerings from the bank. That followed a $4.15 billion deal from Tencent Holdings Ltd. last week, as well as recent issuance from China Construction Bank Corp.’s Hong Kong unit and a handful of well-known property companies including Kaisa Group Holdings Ltd.

At the same time, only one first-time Chinese dollar-bond issuer has tapped the market since Huarong shocked investors by missing a deadline to report earnings at the end of March, down from a monthly average of about eight deals from debut issuers last year. Speculation that Huarong may restructure its debt pushed spreads on a Bloomberg Barclays index of investment-grade Chinese dollar bonds to nine-month highs last week. They remain elevated despite signs that the government may provide Huarong with financial support.

While Chinese policy makers may welcome more bond-market differentiation as they try to wean investors off implicit government guarantees, it’s unclear how big an adjustment Beijing is willing to tolerate. If lesser-known issuers struggle to sell bonds or face dramatically higher borrowing costs, it could prompt authorities to put a greater emphasis on resolving Huarong’s challenges without inflicting too much pain on bondholders.

So far, spreads have remained well below levels that would suggest investors anticipate a severe impact on funding. But that could change quickly if Huarong announces a bond restructuring. The distressed-debt manager, which is controlled by China’s finance ministry, is among China’s most systemically important companies outside the nation’s state-owned banks.

“We do think there will be lingering impact on China, particularly investment-grade bond spreads in the foreseeable future,” Jenny Zeng, co-head of Asia-Pacific fixed income at AllianceBernstein, said in an interview on Bloomberg TV.

Investors are assessing which sectors with low transparency or high leverage show similarities to Huarong, how government support should be priced going forward and how to interpret different reactions in offshore and onshore markets, Zeng said.

Worries about Huarong have been most acute among offshore bondholders, in part because most of the company’s dollar debt contains a form of credit protection called a keepwell agreement that has yet to be fully tested in court. It’s unclear whether Huarong would be compelled to make good on more than $20 billion in dollar bonds if its offshore units were unable to repay.

The company has said it has adequate liquidity and plans to announce the expected date of its 2020 earnings release after consulting with auditors.

Huarong and China’s three other big state-owned managers of bad debt have about $5.2 billion of dollar bonds maturing this year, according to data compiled by Bloomberg.

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