The Chinese government is bailing out China Huarong Asset Management Co., its largest purchaser of distressed bank assets, with an injection of $6.5 billion from financial institutions that are owned by the state.
The restructuring of Huarong, a Beijing-based company that purchases defaulted or distressed commercial loans and attempts to recover money from them, was not surprising to some investors.
Huarong said in its filings to Hong Kong’s stock exchange late Wednesday that the majority stake would be owned by the Ministry of Finance, declining to 28% from 57%.
The Wall Street Journal first reported the story.
The second largest shareholder with a 23.46% stake would be the Citic Group, China’s largest state-owned financial institution that would in turn issue shares to five other institutions.
Another four state-owned financial companies will purchase a 27.85% stake together: China Life Insurance; China Insurance Investment; an investment unit of Industrial and Commercial Bank of China; and China Cinda Asset Management Co., another bad-debt asset manager.
Huarong, whose majority shareholder is China’s Finance Ministry, wound up with major losses in 2020 when it started investing in non-distressed assets. Those included raising debt in other countries and launching into equities trading, commercial lending and leasing businesses.
The Chinese government chose to bail out Huarong so it would not default on billions of dollars in international debt.
But it chose not to step in to prevent the financial distress of property giant China Evergrande Group, which has U.S. dollar bonds that have now plummeted to severely distressed levels in the past few months.
The asset manager’s U.S. dollar bonds fell drastically in April when the company pushed back releasing its 2020 earnings and its Hong Kong-listed shares were halted.
By August bond prices reversed their sharp decline as broad strokes of the government bailing out Huarong were revealed, reassuring investors that the odds of a default or debt restructuring would be lowered.
Beijing-based property investment company Sino-Ocean Capital Holdings was mentioned in August as a strategic investor that could be a stakeholder in August.
Huarong did not disclose why the company did not emerge to become a shareholder.
Martin Dropkin, head of Asian fixed income and Hong Kong investments at Fidelity International, told the Wall Street Journal that his company had held the belief that China would step in to resolve Huarong’s deep financial woes.
The bailout from the government occurred because distressed debt is a sector that is “important” and “intertwined” with the operations in the banking sector in China, Dropkin said at a Hong Kong media briefing in Hong Kong on Thursday, according to the article.
In 2020, Huarong’s loss wound up at a massive $16 billion because it had to take write downs for many loans and assets whose values plunged.
Huarong said the restructuring should be completed by the end of the year and it will be able to meet its capital adequacy ratio of 12.5%.
The ratio, a Chinese regulatory requirement for financial institutions, had declined to 6.32% in June.
The asset manager’s restructuring plans include divesting a 40.53% stake in Huarong Xiangjiang Bank, a lender, and its 79.92% ownership in Huarong Financial Leasing.
The company will also sell its majority stake in two businesses, consumer-finance and securities companies, and will sell some of its distressed assets.