Huarong set to get 50b yuan in Citic-led recapitalisation

Shanghai

CHINA Huarong Asset Management Co is poised to receive about 50 billion yuan (S$10.5 billion) of fresh capital as part of an overhaul plan that would shift control of the embattled company to state-owned conglomerate Citic Group, people familiar with the matter said.

The plan, some details of which are still being finalised and could change, calls for Citic to assume the Chinese government's controlling stake in Huarong from the Ministry of Finance, the people said, asking not to be identified discussing a private matter. The capital injection would come from a Citic-led consortium, two of them said.

The broad outlines of the plan - some of which were reported earlier this week - have been approved by China's State Council and could be announced as soon as this week, the people said.

If Beijing follows through, it would mark the first major attempt to resolve a crisis that has roiled the world's second-largest credit market since April. Huarong's plight has become the biggest test in decades of Chinese authorities' willingness to support troubled state-owned borrowers amid a record wave of defaults.

Existing Huarong shareholders will likely see the value of their stakes plunge as the company recognises losses on non-performing assets, two of the people familiar with the overhaul plan said. US investment giant Warburg Pincus and Goldman Sachs Group are among a group of investors that bought a US$2.4 billion stake in Huarong before it went public in 2015. The stock has tumbled 67 per cent since its listing.

The implications for bondholders are less straightforward. While the capital injection would help shore up Huarong's balance sheet, the stake transfer to Citic would leave Huarong one step removed from government control - a change that may unnerve some creditors. Huarong plans to continue honouring local and offshore debt obligations, but its ability to do so will depend on how much cash it can raise from asset disposals, the people said. Huarong aims to raise about 50 billion yuan from asset sales, one of the people said.

The government's ultimate decision on Huarong will be scrutinised by investors for its broader implications. Any effort to help the company make good on its US$242 billion of liabilities - including about US$21 billion of offshore bonds - would neutralise a potential systemic risk to China's financial system and make it easier for other state-owned borrowers to tap the country's US$12 trillion credit market.

At the same time, authorities may be wary of providing unconditional support. That would likely undermine President Xi Jinping's campaign to curb reckless borrowing, much of which has been enabled by implicit government guarantees. When asked about Huarong last month, a spokesman for China's banking regulator said the government addresses problems at risky companies with "market-oriented" solutions.

Some analysts have warned that rescuing troubled companies will only delay China's reckoning with its record corporate debt pile, making it more painful when a crisis inevitably strikes.

In response to a request for comment, Huarong said its public filings should be the primary source of information about its situation. On Tuesday the company said in a Hong Kong exchange filing that shareholders had approved several resolutions at an extraordinary general meeting, including the appointment of a new executive director. The filing didn't mention anything about a capital injection. Citic, one of China's biggest state-owned companies, didn't respond to requests for comment. Nor did the Ministry of Finance and the China Banking and Insurance Regulatory Commission, which regulates bad-debt managers.

Huarong's fate has been a subject of intense speculation since it missed a deadline to report results at the end of March. That stoked concern the company might be headed for a landmark default, sending its bonds to record lows.

While missed payments at state-owned Chinese companies have become more common in recent years, none of the defaulters have been as systemically important as Huarong. In addition to its close link to China's central government and complex web of connections to other financial institutions, Huarong is also one of the country's biggest issuers of offshore bonds that sit in portfolios from Hong Kong to London and New York.

Huarong has so far repaid all its bonds on time and said last month it would redeem a US$500 million perpetual note in September, helping to boost market confidence. The company has also reached agreements with state-owned banks to ensure it can meet obligations through at least the end of August, Bloomberg reported in May.

Investors have remained jittery because both Huarong and regulators have stayed quiet about the state of the company's finances and restructuring plans. Huarong's dollar bonds due January 2025 trade at about 84 cents on the dollar, implying an unusually high risk of default for an investment-grade issuer.

Whether or not the capital injection plan comes to fruition, Huarong's balance sheet is poised to shrink over time, people familiar with the matter said. The company is planning to sell nearly all its local units outside of the core distressed-debt business, Bloomberg reported in June. BLOOMBERG