How An Anbang Default Could Rock The Market: Wall Street Explains

Last June, when looking at the most unstable of China's mega conglomerates Anbang Insurance (the others are HNA, China Evergrande and Dalian Wanda), we said that "Anbang's troubles could soon become systemic."  Half a year later, that's exactly what happened when in a "surprising" twist, the $315 billion insurer was bailed out by Beijing, just days after we pointed out the tremendous surge in the yield on its bonds.

And while the market has so far blissfully ignored the potential consequences of this admission by China that all is not well with its biggest corporations, that may soon change.

For starters, there is HNA's massive debt: according to Bloomberg data, HNA Group’s dollar debt dwarfs that of other stressed Asian borrowers such as Noble Group Ltd. and India’s Reliance Communications. S&P Global Ratings recently lowered HNA Group’s credit profile to ccc+ from b earlier this month, saying it is unclear if existing access to capital markets and some apparent bank support is sufficient for meeting its upcoming obligations. One look at the chart above should confirm that any hope HNA may have had of accessing markets is now gone, leaving only the government as a lender of last resort.

And while there’s no indication - yet - that HNA is facing such financial difficulties that a default is in the offing, some market participants are starting to game plan scenarios, and a variety of takes have emerged.

For one, the amount of dollar bonds outstanding for the conglomerate and its units, at $13.7 billion, accounts for more than 1% of Asian high-yield bonds outside of Japan, and raises the question of the impact on the broader market. While many see little wider impact in the event of a default, the case of China’s most popular, to date, debt default - that of Kaisa Group Holdings three years ago, when Asian dollar junk bond premiums widened considerably - should serve as a warning.

Below is a summary of some initial views from analysts on how any default scenario for HNA would impact the Asian bond market. What is remarkable is just how optimistic every single analyst is that a default won't result in contagion. Which, if history is any indication, means that precisely the opposite will happen. Courtesy of Bloomberg:

HSBC (Glenn Ko) - Isolated case

  • HNA is more of idiosyncratic case rather than systemic. Institutional clients and even China-based investors are not involved. Therefore the impact should be contained. Of course, if this happens on top of other negative news flow in the market, the situation could be different

Lombard Odier (Homin Lee) - Situation manageable

  • HNA is a well-known story right now, so the impact of its bond fallout will be limited. Other BB names in Asia still have a strong tailwind behind them, such as real estate names amid macro stability. Single name facing some default issues will be manageable in the credit markets in Asia
  • “I don’t doubt there could be some intra-day moves reflecting this worry. But in terms of the overall trend, can it make a difference? I doubt it”

ANZ (Owen Gallimore) - Default digestible

  • Isolated Chinese non-state-owned junk bond defaults will be digested, even if it is HNA
  • In many ways non-rated state-owned firms and LGFV dollar bond issuance has replaced the traditional China HY market of developers and industrials, so one needs to see problems in these sectors for a broader market correction

Haitong International (Ray Wepener) - Contained contagion

  • “The impact of an HNA default on the wider market would depend on a number of factors. I would expect a knee jerk reaction, mostly isolated to recently (overseas) acquisitive companies"
  • While HNA spreads more than doubled in 2017, Asian HY spreads tightened by 100 basis points from the wides
  • The market has seen for some time now that ‘buy the dip’ has provided a floor, which should contain any widespread contagion

UBS - Spread surge

  • A default scenario would increase funding costs for high-yield issuers, mainly Chinese property companies and LGFVs, and could push out spreads on junk bonds in the region by 160-240 basis points, according to a Feb. 6 equity strategy note
  • UBS said in the report it doesn’t cover HNA and hasn’t done due diligence on the company, so it cannot comment on the likelihood of a default

* * *

Finally, here an interesting take from Bloomberg Markets Live commentator, Andrew Cinco, who sees the Anbang blowup as eerily similar to the Japanese bubble peak.

I guess the NYC Landmark signal still works. Anbang goes wobbly just a few short years after its splashy purchase of a trophy Manhattan property, the Waldorf-Astoria Hotel. It brings to mind the Japanese real-estate bubble in the late 80s, and one has to wonder whether China will suffer the same retreat eventually.

The height of Japan's property-market glory was marked by Mitsubishi Estate's acquisition of Rockefeller Center in October 1989 (NB: the Nikkei Index peaked just two months later, on Dec. 29). Mitsubishi walked away from the iconic property almost exactly six years after announcing the deal. The NY Times reported the end of the deal this way:

"Mitsubishi's sudden decision to exit Rockefeller Center is the most striking in a string of recent retreats from the trophy properties stretching from New York to Honolulu that Japanese companies acquired during a real estate binge in the 1980s."

Comments

uhland62 ShorTed Fri, 02/23/2018 - 18:45 Permalink

Thought so, too.

 

But in the last days I just read that Anbang insurance was taken over by the Chinese regulator for twelve months, and there had been 'irregularities', too. Unfortunately, those who do not bother to take a look at what the other side (the side involved) might be saying sport skewed views. Morale: Don't think that our media bring it all, twice a week it pays to look at China Daily (or similar, but it's the only one of that kind I know). 

In reply to by ShorTed

D.T.Barnum Ban KKiller Fri, 02/23/2018 - 08:20 Permalink

https://www.youtube.com/watch?v=V9EbPxTm5_s

A clip by the host of Mad Money, Jim Cramer who said that you should not move your money from Bear Stearns, which was trading at $62 at the time. 6 days later the company was brought out by JP Morgan for $2 per share. Jim Cramer later says that he was not referring to the company shares but instead the money that people had in Bear Stearns.

In reply to by Ban KKiller

NoWayJose Fri, 02/23/2018 - 08:22 Permalink

Anbang is fine - if nothing happens to the many Goldilocks bubbles across the globe.  The bubbles allow any asset to be accepted and priced at current levels.  The crisis happens when the government or Central Banks try to ‘fix’ something - and force a re-valuation downward of an asset.  If the re-valuation hits when Anbang is on the wrong side of that position - then you have trouble.

See Nixon off gold standard, S&L crisis, various wars, Fed rate increases, mortgages no longer deductible, etc.

inhibi NoWayJose Fri, 02/23/2018 - 12:02 Permalink

Tru dat. Problem is a lot more complex these days though, when all governments and CBs are globally interconnected. The power of the CBs and govs to re-evaluate assets is becoming worse, hence QE became the de-facto way of artificially pushing assets back up after a crash (and implemented across the globe). 

One has to imagine what they really talk about in Davos....

In reply to by NoWayJose

NoDebt Fri, 02/23/2018 - 08:23 Permalink

As long as markets are fake (and they don't come any more fake than in China), infinite money will be spent to prevent an outbreak of the dreaded "C-word".  No, the other C-word (contagion).

 

itstippy buzzsaw99 Fri, 02/23/2018 - 10:13 Permalink

In China, a government bailout is quite different than it is in the West.  China's central government moves in, stops the bleeding, and vigorously prosecutes the guys responsible for the failure.  They don't fine the offending corporation, provide bailout funds to pay the fine, and leave management intact.  They make an example of the guy in charge; they sieze all his personal wealth, throw him in jail, and sometimes shoot him.

This has a "cooling effect" on wild speculation and (non-government approved) corruption.  If President Xi Jinping’s anti-corruption and de-leveraging campaign is for real it will have far-reaching consequences for the global "hot money" supply.  Who knows, it may even affect Vancouver, Manhattan, and London real estate!  Seriously though, if the supply of Chinese "investment vehicles" paying 10%+ goes away, the global financial system will feel it big time.

Here's how  Chinese Government Bailout works (read between the lines):

https://www.bloomberg.com/news/articles/2018-02-23/china-regulators-to-…

 

In reply to by buzzsaw99

Pi Bolar Fri, 02/23/2018 - 08:42 Permalink

China? Isn't that the place where immigrants go to to get free shit? Oh, wait a minute, that's not them. China will be fine. USA, UK and Sweden will implode. 

Truth Eater Fri, 02/23/2018 - 08:52 Permalink

Built on a straw foundation, the mighty structure was bound to fail.  Nobody looked at the structure, just the overly-sanded concrete mix that caused walls to crumble.  Many buildings are about to fall.  The way of the world meets the way of cheating, thieving men.

Son of Captain Nemo Fri, 02/23/2018 - 09:16 Permalink

"YES" of course...

Let's blame it on the Chinese that we gave all of our IT factories to post-9/11 and go to war with them and Russia over North Korea?...

What $155 trillion (and counting) in unfunded liabilities will do to the once mighty that have to blame their own failure and worst judgement on someone else because they refuse to give the "flunking student" interest free loans???...

All I see is bright shiny "this" (https://www.zerohedge.com/news/2018-02-21/russia-surpasses-china-massiv…) headin East like a runaway train that the Fed can't STOP because it refuses to allow the price to rise against it's own currency making it the most attractive to those with "REAL" MONEY!!!

Soph Fri, 02/23/2018 - 10:28 Permalink

Direct exposure is pretty small beans with these co's. In our new world order of TBTF, the Chinese will make sure nothing bad happens.

Sorry ZH disaster seekers, nothing to see here, move along. (seriously though, this one really is small beans).