China Bad Asset Manager Is a Bad Asset

How can a company go bankrupt when everyone who goes bankrupt, gets bailed out and it buys the assets of those bankrupt companies?

Zerohedge: "This Is A Fatal Event": China's Bond Market Hammered After Huarong Bankruptcy Rumors

As Bloomberg reports, growing panic over the financial health of one of China’s largest bad-debt managers spilled into the broader market, as traders circulated a Caixin report that openly considered the worst-case scenario for the company. Specifically, in a commentary dated Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy.

Not helping was the latest pileup by rating agencies, with both Moody’s and Fitch saying Tuesday they will review their ratings of Huarong - an investment grade credit for now - for a potential downgrade, following a similar announcement from rival S&P Global Ratings last week.

...“Market speculation of a restructuring with haircuts for Huarong International bondholders is heavily damaging investor sentiment,” said Chang Wei Liang, a macro strategist at DBS Bank Ltd. in Singapore. “The continued silence of Chinese authorities on the predicament of a strategic state-owned institution as large as Huarong is also worrisome, as investors had anticipated at least a modicum of reassurance.”

Sure enough, in typical Chinese style contagion, the Huargon selloff spread to other high-yield Chinese dollar notes on Tuesday, with some property bonds falling by a record. Asia’s investment-grade dollar debt spreads widened as much as 3 basis points, while a gauge of Asia credit risk widened for a seventh straight day, set for the longest rising streak since 2018.

This has neve led to the type of systemic risk that is possible within China's expansive credit bubble, thus what is more interesting to ponder is...why now? Why would anyone go bankrupt in the middle of a rising tide of credit...unless the tide is already going out?

Of note, the chart on Huarong stock doesn't look as bad as the news suggests, in fact it looks like the opposite given the context.

Bad Debt Prices Soaring in China, But Big 4 AMCs Under Pressure

21st Century: 万亿不良资产市场“看起来很美” 四大AMC的盈利压力与隐忧

After the banks' non-performing assets were brought to the market in 2014 on a large scale, the price of non-performing asset packages was basically maintained at about 30% of the original value. After 2017, the prices of similar non-performing asset packages are increasing. The actual package price of assets in the first half of 2017 is about 40% to 50%, and the transaction price of some asset packages exceeds 60% in the second half of the year, and some even reach 70% to 80%.

In recent years, with the increase in non-performing assets of the banking industry, financial asset management companies (AMCs), which are mainly engaged in the disposal and disposal of non-performing assets, have developed rapidly. At the same time, local AMCs, private investors, private equity funds, etc. have also poured in one after another, trying to share a share of the trillions of bad asset markets.

On the one hand, the influx of funds from all directions, the direct result is to push up the price of non-performing asset packages, further reducing the AMC's profitability. On the other hand, after the commercialization transformation, AMC needs to raise funds through marketization. The recent rise in capital prices has also aggravated the cost pressure of AMC.

Bad debt prices are rising, the AMCs bought during the low points in late 2014 and into 2016, now they can unload at good prices, raise capital and wait for the next round. "Costs are rising" means there aren't enough bad assets following a wave of credit creation and rising optimism.

Here comes a splash of cold water.

Just as an AMC employee told the 21st Century Business Herald reporter: "The bad acquisitions and disposals need to be cross-cycle, generally buy a lot of bad assets in the economic down cycle, dispose of them in the up economy, and get through this cross-cycle operation method. In the past 5 years, the macro economy has been in a downtrend channel, and AMC has bought more and retired less, there is bound to be profit pressure."

Bad debts are piling up during the credit infused recovery?

It is precisely because of this that AMC has to develop debtor services to become its stable source of income and profits, but the risk has also come. A person in charge of the AMC business department frankly admitted to reporters from the 21st Century Business Herald: “In the past, when doing debt service, it was profitable to accept financial consulting fees and profit, but it did not consider risk factors, such as making provisions and losses. The economic downturn has caused problems in debt-type projects and it is difficult to make profits."

A partial breakdown of Cinda and Huarong follows:

In 2017, Cinda’s total revenue was RMB 120 billion, of which, receivables of non-performing assets of receivables were RMB 17.773 billion, and changes in the fair value of non-performing assets were RMB 8.266 billion, which totaled RMB 26.039 billion, accounting for only 21.69% of the total. Together with the debt-to-equity assets investment income, net proceeds from disposal of repossessed assets, and other custody clearing, restructuring services commissions and fee income, etc., a total of 40.191 billion yuan, accounting for 33.5% of total revenue.

At the same time, the company’s other investment income was 29.465 billion yuan, net premiums earned were 192.67 yuan, and interest income was 20.64 billion yuan. It can be seen that the income from various financial services such as securities, insurance, banking, and financial leasing has become an important source of Cinda's income. According to official data, non-performing assets accounted for “half of the country’s total”, and bad business accounted for 57.7% of pre-tax profits.

Similar to Huarong, Huarong's total revenue in 2017 was 128 billion yuan. The receivables of non-performing assets of receivables were 30.753 billion yuan, the change in the fair value of bad debt assets was 4.661 billion yuan, the interest income was 21.015 billion yuan, the investment income was 441.79 yuan, and the revenue from non-performing assets business operations accounted for 27.67%.

The previous operating income of non-performing assets of Huarong officials was 68.912 billion yuan, accounting for about half of the total. It also includes debt-to-equity assets business, trust agency business based on non-performing assets, non-performing asset management business carried out by subsidiaries, special opportunity investment business based on non-performing assets, and real estate development business based on non-performing assets.

In terms of capital cost, Huarong’s short-term borrowing rate is 1.65% to 9.00%, and the long-term borrowing rate is 2.00% to 9.50%, respectively.

In addition, given the low cost of financing in overseas markets, Huarong has issued bonds on a large scale overseas. From 2013 to 2017, Huarong issued a total of financial claims and secondary capital bonds of 106 billion yuan, and Huarong International's subsidiaries also had 12 billion US dollars of bonds.

Cinda and Oriental Capital have similar financing conditions. As of the end of 2017, Cinda's bonds payable was 202.4 billion yuan, loans were 580.4 billion yuan, and deposits were 226.2 billion yuan. Cinda parent company fixed loan interest rate is 3.6% -7.06%, floating loan interest rate is 4.75% -4.85%. The short-term loan from the East is 133 billion yuan, the annual interest rate is 1.96%-7.5%, and the bond payable is 130.2 billion yuan. The long-term loan is 177.9 billion yuan, and the interest rate is 2.7%-7%. Great Wall has not released its 2017 performance report yet. It has not publicly disclosed relevant data.

In April this year, the East also announced that it has introduced four strategic investors, including the National Social Security Fund, Telecom, China National New Capital, and Shanghai Electric Group, with a combined total equity of RMB 18 billion. At present, the Great Wall is also in the lead.

The local AMC situation has taken a step. A local AMC personage told the 21st Century Business Herald reporter that “Compared with the Big Four, the local AMC’s funding channels are narrower, mainly capital funds and bank loans. There are also some AMCs trying to develop asset and equity financing methods, but they are It is very small. Compared to the regular army, the cost of funding for private organizations is higher, 15% is a common situation, and some even exceed 20%.”

AMC people also believe that the bank itself has a lot of non-performing asset disposal methods. The pressure for external transfer is mainly from regulatory compliance and assessment pressure. The advantage of AMC lies in its flexible approach, which can be transferred in a premium and can also hold these assets for a long period of time. The key factor is the cost of capital, and the current funds are mainly short-term funds, which are difficult to match with the cross-cycle disposal methods.

Related

SCMP: China’s local bad-asset managers drift from policy mandate

Chinese Banks Not Interested in Debt for Equity Swap; Bad Debt Firms Circle

Bloomberg: China's Large Banks Wary on Li Keqiang's Plan for Bad Loans

Asked about the plan at the Boao Forum last week, China Construction Bank Corp. Chairman Wang Hongzhang said he needs to think of his shareholders and wouldn’t want to see a plan that simply converted "bad debt into bad equity."

China Citic Bank Corp.’s Vice President Sun Deshun said at a press conference last week that any compulsory conversion of debt into equity would have to be capped. And Bank of China Ltd. Chairman Tian Guoli said in Boao that it’s "hard to evaluate" how effective debt-equity swaps will be, as so much has changed in China since the tool was used to bail out the banking system during a previous crisis in the late 1990s.

The bad debt firms are the better choice:

One big difference with the previous bailouts of 1999 and 2004 is the fact that many of the banks, SOEs and the asset-management companies have since sold their shares, in many cases to international investors, and now have to take shareholder interests into account, says Guangfa’s Mu.

...While banks are hesitant, China Huarong Asset Management Co., one of the four bad-loan managers that took part in the 1999 bailout and swaps, is actively pitching for a role in any new round of debt-equity conversion. The government should provide 1 trillion yuan to 3 trillion yuan of funding support, with banks, SOEs and asset managers sharing the risks, Lai Xiaomin, chairman of Huarong, said in a proposal to the top legislature earlier this month.