Chinese bad-debt managers downgraded by Moody’s as Huarong cut to junk

CHINA’S largest bad-debt managers suffered Moody’s Investors Service’s rating downgrades that cut China Huarong Asset Management to junk status, over concerns about the property crisis.

Huarong AMC’s long-term rating was reduced one notch to Ba1. Three other peers – China Great Wall Asset Management, China Orient Asset Management, China Cinda Asset Management – also had their ratings cut on Friday (Jan 19) by one to two notches.

Moody’s action is the latest alarm sounded over the property sector ills’ spillover across the economy, despite Beijing’s pledges for support policies. It also resembles a sector-wide downgrade by Fitch Ratings earlier this year, when the ratings firm cited concern over bad-debt managers’ financial conditions.

Three of the companies cited by Moody’s – Huarong, Cinda and Orient Asset – also were put on negative outlook. Their asset quality and profitability will remain under pressure due to “the persistent strain on China’s property market and slowing economic growth,” Moody’s said.

In early 2023, Chinese financial regulators tapped some bad-debt managers, including Huarong and Cinda, to offer possible lifelines for the ailing property sector. Meanwhile, some of the companies already have had significant real estate-sector exposure that have hurt their bottom line.

Huarong – whose former chairman was executed in 2021 after being convicted of taking nearly US$250 million of bribes – was the most aggressive in the industry in expanding beyond its early mandates.

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Last year, Moody’s lowered the rating for Huarong’s offshore financing vehicles’ senior unsecured debt to a junk rating. Huarong still has an investment-grade rating with Fitch Ratings and S&P Global Ratings.

Huarong AMC’s asset quality will continue to be strained by its exposure to property developers via its acquisition-and-restructuring distressed asset management business, Moody’s said on Friday.

The asset manager will likely maintain a large amount of credit lines from commercial banks over the next 12 to 18 months, Moody’s said.

Huarong is one of the four state-controlled entities set up by China’s government in 1999 to help clean up a banking system riddled with bad debt. But the quartet later expanded beyond their original mandate, creating a labyrinth of subsidiaries to engage in other financial businesses and borrow billions from the bond market. BLOOMBERG