China Bad-Loan Buyer Taps Dollar Debt as Borrower Costs Fall

China Huarong Asset Management Corp., one of the nation’s four bad-loan managers, is marketing dollar bonds as souring debts surge and borrowing costs fall to a more than 16-month low.

A unit of the Beijing-based group is offering three-year notes at a spread of about 245 basis points more than Treasuries and five-year securities at around 260 basis points, a person familiar with the matter said. Average yields for Chinese dollar-denominated bonds fell to 5.36 percent July 8, the least since February last year, JPMorgan Chase & Co. indexes show.

Companies in China are selling record amounts of debt even as economic growth slows to the least in more than a decade. Corporate debt in Asia’s biggest economy surpassed that in the U.S. in December, Standard & Poor’s said in a report last month, ballooning to $14.2 trillion versus $13.1 trillion. Non-performing loans jumped the most since 2005 in the first quarter and state-owned asset management companies like China Huarong are raising funds to help clean up lenders’ balance sheets.

“Asset Management companies are opening a channel for Chinese banks to dispose of credit risk which they don’t wish to hold on their balance sheets,” Thomas Drissner, a Singapore-based investment manager at Aberdeen Asset Management Plc, said by phone. “They’re now actively raising funding in markets which can definitely be seen as them preparing for more non-performing loan transactions going through, which in the long run might well be a positive for the banking industry in China.”

Biggest Manager

China Cinda Asset Management Co., the nation’s biggest bad-loans manager, sold $1.5 billion of dollar bonds on May 7, according to data compiled by Bloomberg. Its $1 billion of 4 percent notes due 2019, issued at a 250-basis-points spread, are now trading at a 220-basis-points premium, Bloomberg-compiled prices show.

The Ministry of Finance owns almost 70 percent of China Cinda, which along with China Huarong was created in 1999 to buy bad loans. Beijing-based China Cinda specializes in distressed real estate, and the two other asset-management companies are China Great Wall Asset Management Corp. and China Orient Asset Management Co.

China Huarong hasn’t tapped the U.S. dollar bond market before, data compiled by Bloomberg show. It’s paying a weighted average fixed coupon of 5.68 percent on its outstanding yuan-denominated notes. The company’s new debt is expected to be rated Baa1 by Moody’s Investors Service, on par with China Cinda’s notes.

Highest Profit

China Huarong has the “largest consolidated balance sheet size and the highest net profit at the end of 2013” among the four bad-loan managers, Fitch Ratings Ltd. said in a July 4 report.

“It’s one of the leading asset-management companies in terms of the number of debt-to-equity transactions completed and market share in distressed asset acquisitions,” said Terry Gao, a Hong Kong-based Fitch analyst. “China Huarong is also one of two AMCs permitted to access the interbank market and issue financial bonds in the domestic market.”

China Huarong does face some execution risks and potential pressure on capital adequacy given the fast growth in its distressed asset investments over the past three years, the ratings company said. “However Fitch believes its industry experience and seasoned management partly mitigate the risk.”

Risk Increases

The cost of insuring corporate and sovereign bonds in the Asia-Pacific region advanced today, suggesting deteriorating perceptions of creditworthiness.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan rose half a basis point to 102.5 basis points as of 8:37 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The gauge is headed for its highest close since July 1, according to data provider CMA.

The Markit iTraxx Australia index increased 2 basis points to 84.5 as of 10:47 a.m. in Sydney, Australia & New Zealand Banking Group Ltd. prices show. The benchmark is on track to match yesterday’s increase which was the biggest one-day jump since June 16, according to CMA.

The Markit iTraxx Japan index climbed 1.25 basis points to 64.5 basis points as of 9:27 a.m. in Tokyo, Citigroup Inc. prices show. The measure is poised for its biggest one-day gain since May 21 and its highest close since July 3.

The indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality.

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