Huarong solvency claim takes heat off SOE bonds

But Unigroup bankruptcy proceedings could add fuel to selloff that sent ATF index into negative territory for first time in two years

Huarong solvency claim takes heat off SOE bonds

(ATF) China Huarong Asset Management has said it has enough cash to pay its debt obligations – news that’s likely to ease jitters in credit markets that have slumped on concern the embattled debt manager will default.

While the fate of Huarong may have taken some of the steam out of the selloff, the possibility that a separate strategically important SOE will file for in-court bankruptcy could keep pressure on credits. 

The announcement by Huarong vice president Xu Yongli in an interview with the state-run Shanghai Securities News came at the end of a week in which the bonds of state-owned enterprises (SOEs) cemented a third consecutive month of losses for investors.

Also on ATF

The declines this week sent an ATF gauge of government-backed corporate bonds into negative territory for the first time in two years. 

The Enterprise sub-index of the returns-focused ATF China Bond 50 Index fell 0.43% in April, adding to a 0.59% slide in March and a 0.17% decline in February. Its drop was hastened by a 0.12% slide in the past week.

Weighing on the index is the concern that the government backing that once made SOEs iron clad against default may no longer be available. Regulators and national leaders have yet to enter the fray to help Huarong as its own bonds teetered on the brink. 

The bad-debt manager’s troubles have been long in gestation and resulted in a spate of domestic and international credit downgrades, which have sent down the value of its own bonds. Huarong’s former chief was executed earlier this year for fraud.

A slew of Caixin purchasing managers indexes (PMIs) for April, including the key services measure, are forecast to come in higher month-on-month, lending support to bonds.   

Adding potential volatility, however, is the possibility that chipmaker Tsinghua Unigroup will file for in-court bankruptcy.

Unigroup may make the application once the Tsinghua University, to which the chipmaker is attached, celebrates its 110th anniversary, according to researcher Reorg, which cited two sources familiar with the matter.

Unigroup’s failure to meet a bond repayment last year helped spark a rout in Chinese credits and spread concern about the riskiness of the sector.