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.
HNA's 2019 bonds YTM 12%, after hitting 14.2% recently pic.twitter.com/DwZj0GgOWv— zerohedge (@zerohedge) February 18, 2018
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
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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."