November 30, 2018 / 8:54 AM / 15 days ago

China lenders resist reputational risks

* Loans: Huarong syndications stall after corruption probe

By Apple Lam and Evelynn Lin

HONG KONG, Nov 30 (LPC) - China Huarong Asset Management, China’s biggest bad-debt manager, has shown that even state-owned borrowers can struggle to attract international lenders.

Huarong, previously seen as a safe haven for banks, has found it tough to refinance its offshore loans since Chinese authorities began investigating its chairman in April.

The group has cancelled at least one attempted syndicated loan since April 17, when Lai Xiaomin stepped down from his role as chairman after the Central Commission for Discipline Inspection, China’s anti-corruption watchdog, opened an investigation. Two other planned financings remain incomplete.

Though Huarong has repaid its maturing debt without trouble and has secured some bilateral facilities, the aborted syndications provided a warning to lenders that large Chinese state-owned enterprises are as susceptible to negative news as privately owned firms.

“We have been very supportive of Huarong entities in the past, but we are now very concerned about the negative news and it’s very difficult for us to get internal approval,” said a senior loans banker at a Taiwanese bank.

The Hong Kong-listed distressed-asset manager – in which the Ministry of Finance owns about 63% – has reined in its overseas expansion after it came under scrutiny in Beijing, but years of breakneck growth have left it with a hefty refinancing bill.

Offshore subsidiaries of China Huarong Asset Management had HK$13.66bn (US$1.75bn) of one-year offshore syndicated and club loans maturing in the second half of this year, for which the parent provided letters of comfort.

The group has also slowed its pace of bond issuance. After raising US$12.1bn in 2017, it has sold just US$950m of overseas bonds in 2018. Huarong has over US$20bn of international bonds outstanding, with US$6.2bn maturing by 2020.

DOOMED DEALS

On the back of the investigation into Lai, Huarong subsidiary Huarong Tianze Investment was forced to cancel an onshore Rmb1bn two-year loan that was in the market. That was despite Moody’s affirming Huarong’s rating of A3 on April 20, saying that government support would help offset its “recent governance issue”.

Lenders were still wary three months later in July, when Credit Suisse launched a HK$3bn loan refinancing for Huarong Investment Stock Corp, another Huarong unit.

Huarong Investment Stock Corp has repaid its 2017 financing with cash, as the Credit Suisse loan has been in the market for more than four months and has not yet closed.

Huarong International Financial Holdings was the next loan market casualty. After organising an August roadshow, Far Eastern International Bank put on hold its plan to launch a refinancing for the HK$2.72bn-equivalent deal that matured in October.

The borrower also had a second HK$1.1bn club that also matured in October, but both were fully repaid with cash and bilateral loans.

China Huarong International Holdings also repaid a US$800m syndicated loan on its original maturity date in September, even though the company had earlier exercised an extension option to June 2019.

A senior Hong Kong-based loans banker at a foreign bank said the timely repayment of Huarong’s offshore loans proactively protects the group’s reputation, which is the first step to rebuilding lenders’ confidence.

“Some borrowers would force banks’ hands by asking for an extension, as if to say, ‘either you extend or we default’, but Huarong chose to repay lenders on time and ensure there were no delays or defaults,” he said.

LENDING A HAND The loan repayments followed S&P’s downgrade of Huarong to BBB+ from A– in late August. The rating agency said the group’s leverage will remain high.

However, Moody’s again affirmed Huarong’s A3 rating in early September, saying the company will receive a high level of support from the Chinese government.

That support is the key to maintaining credit lines with Chinese banks, which will help pave the way towards successful syndications and clubs in the future. Apart from top-down policy directives from the government to lend to certain companies and industries, and formal documentation such as letters of comfort, informal gestures of support also hold weight.

“If we feel the Chinese government seems to be offering a lot of informal support such as during face-to-face meetings with the client, or if state departments respond more quickly than usual to requests for letters of comfort, we will feel much more comfortable providing financing during hard times for the company,” a loans relationship manager at a Chinese bank said.

Large state-owned companies could also agree smaller club deals to build lenders’ confidence in their ability to obtain wholesale loans.

“If Chinese banks, out of consideration for policy directives, or other lenders who want to strengthen their relationship with the client, are willing to provide a club, the company should agree to it even if the amount is small because when other lenders in the market see that, they will be more interested in joining a larger syndicated loan later,” said a loans banker at another Chinese bank. (Reporting by Apple Lam and Evelynn Lin; Editing by Chris Mangham and Steve Garton)

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