China Huarong Asset Management Co. is stepping up efforts to sell almost all of its local units outside of distressed debt, as part of a government-approved downsizing plan to bolster the struggling conglomerate’s finances.

Huarong is soliciting bids and engaging with potential buyers after China’s banking regulator ordered it to step up asset sales in April, people familiar with the matter said, asking not to be identified to discuss the matter. private information. The coveted financially licensed units – including banking, securities trading and leasing – are among those gaining the most interest, people said.

The units for sale do not include China Huarong International Holdings Ltd., an offshore entity that issues or guarantees the bulk of Huarong’s dollar bonds, the sources said. It remains unclear whether China’s top leaders have decided on a long-term plan for bonds, some of which are trading at levels implying a high risk of default.

Huarong’s ability to repay depends in part on how much money she can raise by selling non-essential businesses. While profitable units, including banking and leasing, may be relatively easy to offload, money losers such as asset management will be more difficult. The company’s fragile finances give it limited leeway to negotiate high prices, unless Chinese authorities coax potential buyers to pay. Huarong is majority owned by the country’s finance ministry.

Speculation about the company’s fate has swirled since it missed a deadline to release 2020 results at the end of March. Even though Huarong continued to repay the bonds maturing on time, its perpetual 4.5% ratings are trading at around 67 cents on the dollar.

Many investors now see the company as an important test of Beijing’s willingness to support public borrowers amid a record wave of defaults. The ruling Communist Party has long focused on financial stability, but it also increasingly wants to improve the pricing of risk in local credit markets and wean investors from the assumption that oversized companies will always be bailed out.

Huarong, which has around $ 21 billion in dollar bonds outstanding, aims to release its 2020 results by the end of August, one of the people said, on a schedule announced by Bloomberg in May. Some of the Company’s obligations contain provisions that could result in a technical default if it does not publish financial statements by then.

Huarong and the China Banking and Insurance Regulatory Commission did not respond to requests for comment.

One of the conglomerate’s biggest assets for sale is a 41% stake in Huarong Xiangjiang Bank Co., people familiar with the matter said. The Hunan local government has expressed interest in purchasing the stake, one of the people said.

Caixin Media’s WeNews reported on Tuesday that Huarong had started divesting seven units in areas such as finance and domestic asset management. The company’s total assets will fall to about 1,000 billion yuan ($ 156 billion) from 1.7 trillion yuan, according to the report.

Reuters reported earlier this month that Deutsche Bank AG was planning to buy Huarong’s stake in Huarong Rongde Asset Management, citing a person with knowledge of the transaction. A spokesman for the German bank later told Bloomberg he had no plans to buy the stake.

While Huarong’s overhaul efforts have shifted into high gear in recent months, they date back to 2018, when then-president Lai Xiaomin was accused of bribery in one of the country’s biggest financial scandals. China. The episode led regulators to call for an overhaul of the entire industry. Huarong and the other three Chinese state-owned distressed debt managers have been ordered to get rid of non-core assets and focus on their original mandate of getting rid of bad debts. Lai was executed in January.

Huarong appointed Liang Qiang as the party’s deputy secretary this month, earning an industry veteran to help lead his overhaul efforts.

The most recent financial statements of the company showed that it achieved a pre-tax profit of 3.9 billion yuan in the first half of 2020, down 42% from the previous year. Its profitable units include core distressed debt, banking, leasing and securities trading businesses.

Huarong’s financial units pre-tax profit Assets
Securities and futures 294 million yuan 73 billion yuan
Leasing 1.2 billion yuan 136 billion yuan
Banking 2.16 billion yuan 387 billion yuan

The asset management and investment segment, which includes Huarong International, recorded a pre-tax loss of 5.6 billion yuan in the first half of 2020. Huarong International said in April that it had returned to the first quarter earnings and that all of its operating metrics were on target. .

– With the help of John Liu, Jun Luo, Zheng Li and Dingmin Zhang