Shuli Ren, 29 April 2021
After the collapse of Lehman Brothers Holdings Inc., the Big Three rating companies were blamed for their enabling roles in the subprime mortgage crisis. Troubled securitized products would not have been marketed and sold without their seal of investment-grade approval. In fact, investors relied on their ratings, often blindly.
Over a decade later, similar drama is unfolding with state-owned China Huarong Asset Management Co. After failing to release its 2020 financials on time amid media reports of a deep restructuring, the distressed-asset manager became a distressed asset itself. Its 4.5% perpetual bond is trading at 70 cents on the dollar, not at all aligned with its safe-as-cash ratings. With $22 billion in dollar bonds outstanding, Huarong has issues due every month into the summer.
All three rating companies are starting to head for the exit door. S&P Global Ratings and Moody’s Investors Service put Huarong on negative credit watch earlier this month, joined by Fitch Ratings which went a step further Monday, cutting Huarong’s ratings by three levels to BBB from A. China Cheng Xin International Credit Rating Co., an onshore agency that has AAA ratings on Huarong’s yuan notes, also issued a negative credit watch on April 14, amidst the broader offshore selloff.
It’s a bit too little, too late. Thanks to these rubber stamps, Huarong became one of the largest Chinese offshore issuers, despite unfavorable terms. In the event of a default, foreigners will struggle to get their money back. These bonds are not guaranteed by the Beijing-headquartered parent, but by a cash-strapped offshore subsidiary. Meanwhile, other investment-grade state-owned enterprises, such as Yunnan Energy Investment Overseas Finance Co., saw their dollar bonds tumble as well, a sign that investors are losing faith in the ratings. How did Moody’s, S&P and Fitch get China Huarong so wrong?