Huarong finally releases report that stirred debate on financial failure

China Huarong Asset Management Co Ltd updates

Huarong, China’s biggest bad debt manager, has released a long-awaited financial report that outlines a record Rmb103bn ($16bn) loss last year, ending a five-month delay that sparked a debate over Beijing’s approach to corporate failure.

The company, which earlier this month confirmed plans for a bailout from state-backed businesses including conglomerate Citic, said its leverage ratio leapt to 1,333 times by the end of 2020 as losses wiped out most of its equity.

The belated release of the results, which were initially due in April, comes after a chaotic period for a company that was launched in the late 1990s to help clean up the banking system, but saw its former chair Lai Xiaomin executed in January for accepting Rmb1.8bn in bribes after years of expansion.

Last year’s losses were driven primarily by impairments of Rmb108bn, the filings showed, which the state-owned company described as a “painful lesson”. In interim results, it separately unveiled a profit attributable to shareholders of Rmb158m in the first six months of the year.

Wang Zhanfeng, chair, said that Huarong had “badly deviated from its main responsibilities” owing to the “aggressive operation and disorderly expansion” of Lai, whose execution was seen as an unusually harsh punishment for financial crimes. The company also cited the impact of the coronavirus pandemic in 2020.

Huarong had in the past decade expanded significantly both within and outside of China to transform itself into a conglomerate with a range of financial businesses that extend beyond its core remit of managing distressed loans.

It was also a major issuer on dollar-denominated bond markets where investors and traders have assessed whether Beijing would support it. 

In April its perpetual bonds collapsed to levels of 49 cents on the dollar, but have since recovered to trade close to their face value after an announcement of the bailout plan in mid-August.

Fitch, the rating agency, changed its rating watch outlook for the company to “positive” last week, saying it saw the plan as “a step towards the company alleviating its financial stress amid its expected net loss”.

Huarong also said in its results that it would “dispose of subsidiaries with non-core business activities in the near future to increase internally generated fund inflows and to replenish capital”.

In June, S&P, the rating agency, said that Huarong would need to release its results by the end of August to avoid a technical default on a bond issued by Huarong International, one of its subsidiaries.

The company listed in Hong Kong in 2015 and counts Warburg Pincus, the US private equity firm, as one of its biggest investors. Trading in its shares was suspended in April and will remain suspended until further notice, the group said.

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