Citic, Cinda, China Life lead state firms in handing Huarong US$6.6 billion to help China's largest bad debt manager avert bankruptcy

China Huarong Asset Management said it would receive a bailout from five state-backed investors to stave off its bankruptcy, as one of the first and largest of the country's five managers of distressed debt emerges from a restructuring.

Huarong will receive about 42 billion yuan (US$6.6 billion) from a consortium comprising Citic Group, China Insurance Investment's Rongxin Fund, China Cinda Asset Management, China Life and a unit of the Industrial and Commercial Bank of China (ICBC), Huarong said in a late filing to the Hong Kong stock exchange. Huarong would issue shares at 1.02 yuan each under a specific mandate first flagged on August 18 that would require existing shareholder approval.

The issue price works out to a premium of about 23 per cent over Huarong's last-traded stock price in Hong Kong of HK$1.02 before transactions were halted on April 1 for the company's debt workout.

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"The issuance is an important act aimed at addressing the company's current difficulty of capital shortage," Huarong said in its Wednesday filing. "[It is also aimed at] safeguarding the interest of [our] minority shareholders, and maintaining the stable operation of the company."

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Huarong was established in 1999 to take over the bad loans of ICBC, helping to clean up the books of what was then China's largest state-owned bank ahead of its initial public offering. Over the years, Huarong's own books were bloated by bad loans that could never turn around. Corruption by top officials, including former chairman Lai Xiaomin who was executed in January for accepting almost 1.8 billion yuan of bribes and misappropriating 25.13 million yuan, added to its financial woes.

Huarong has US$238 billion in liabilities - including more than US$20 billion of offshore bonds - and has drawn close scrutiny from investors across the world. The company's borrowings amounted to 782 billion yuan as of June 30, of which those coming due within one year amounted to 578 billion yuan.

The Beijing-based company teetered close to bankruptcy as it failed to report its annual financial accounts in April, raising concern that the company would default on its onshore and offshore debt. Huarong finally reported its 2020 results in late August, revealing a 102.9 billion yuan net loss last year that reversed four consecutive years of profits.

An undated photograph of China Huarong Asset Management's former chairman Lai Xiaomin before his execution on January 29, 2021 for corruption. Photo: Weibo alt=An undated photograph of China Huarong Asset Management's former chairman Lai Xiaomin before his execution on January 29, 2021 for corruption. Photo: Weibo

Citic Group, Rongxin Fund, ICBC Investment and Cinda will buy up to 39.2 billion of Huarong's domestic shares, contributing almost 40 billion yuan to the bailout.

China Life, the country's largest life insurer, will buy up to 1.96 billion of its H shares, which are stocks that trade on the Hong Kong stock exchange. The actual number of shares to be issued is subject to regulatory approval, it said.

Citic Group, China's largest state-controlled conglomerate, will become the biggest shareholder in Huarong after the completion of the bailout, with a 23.5 per cent stake. Rongxin Fund will be the second-biggest shareholder with 18.1 per cent, while the remaining three shareholder will each own less than 5 per cent.

The Ministry of Finance will see its stake reduced to about 27.8 per cent from 57 per cent. Its holdings comprise both H shares and Huarong's domestic shares, it said in the announcement on Wednesday.

The issuance of new shares will reduce the public float of the company to 18.2 per cent, from 32.4 per cent. As it is lower than the minimum public float requirement of 25 per cent, it said it had applied to the stock exchange for a waiver.

The plan is still pending shareholder approval at an extraordinary shareholder meeting scheduled for December 2 in Beijing. It also needs to seek approval from the Hong Kong stock exchange for the bailout. Meanwhile, trading of Huarong's shares remains suspended.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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