Fitch cuts Huafa bond ratings to BB+ and lowers government support assessment

Key Facts

On November 9, Fitch downgraded the ratings on Chinese group Huafa’s bonds and lowered its standalone credit profile from b to ccc+, reflecting a reduced assessment of government support and increased refinancing risks. Lianhe Zaobao reported that the agency cut the senior unsecured bond rating from BBB to BB+ and the senior perpetual unsecured bond rating from BBB- to BB. All affected ratings remained on Rating Watch Negative. Separately, China Lianhe terminated the ratings of Zhuhai Huafa Industrial and related bonds on November 10, after the company stopped engaging the agency to rate them. The actions differed in scope: Fitch downgraded the group and its bonds, while a domestic agency terminated ratings for a subsidiary.

Caixin reported that the termination covered Huafa Industrial, the property development and operations platform of Zhuhai Huafa Group and one of the group’s domestic bond issuers. The local agency said the company no longer engaged it to rate the company and related bonds, citing “its own needs and the actual circumstances of its business.” The termination therefore was not an announcement that the group’s ratings had been withdrawn in full. On November 4, China Lianhe had kept the group and its outstanding bonds at AAA, placing all group ratings under negative watch. Caixin reported that the agency linked that action to continued losses, weak cash generation from operations and concentrated repayment pressure. The domestic agency’s position thus combines an AAA rating for the group with a negative review, while the subsequent termination applied only to the property subsidiary.

Fitch lowered its government support assessment for Huafa from 35 to 30, while keeping it at the “extremely high” level, according to Lianhe Zaobao’s wording; the previous level represented “exceptionally high” support. The group’s standalone credit profile also fell from b to ccc+. This reflects a weaker assessment of the group’s ability to meet its obligations without support, as well as a lower score for the agency’s assessment of the likelihood of government backing. In an earlier move, Fitch placed Huafa’s ratings on Rating Watch Negative, citing weak debt-service coverage, near-term maturities and widening bond spreads. The agency linked the wider spreads to unconfirmed market rumors about possible extensions of some debt maturities. These factors form the backdrop to the refinancing risks accompanying the latest rating actions.

Huafa’s borrowings reached $62 billion as profits slowed and the path of its long-term debt raised investor concerns, according to a Bloomberg report published by The Business Times. Lianhe had affirmed the group’s AAA rating in a report issued in June, citing expectations that it would receive strong government support. That high domestic rating stands alongside more recent reviews highlighting losses, weak cash generation and repayment pressure, without by itself implying that the domestic rating has been removed. The comparison shows that credit ratings are also affected by an agency’s assessment of support sources and the timing of obligations, alongside an issuer’s standalone financial position. China Lianhe attributed its decision to terminate Huafa Industrial’s rating to the company’s request, needs and business circumstances, not to a broader interpretation of a change in government policy or rating rules.

The decisions followed volatility in Huafa bond trading: several long-dated corporate bonds fell by more than 20% over the November 2 and 3 sessions, prompting a temporary trading suspension. In Thursday, November 5 trading, the domestic bond due in 2029 rebounded 17% to 85 yuan, but remained below the roughly 100 yuan recorded the previous week. On support, reports said Zhuhai had provided the group with more than 40 billion yuan as of November 5 and announced a plan to coordinate an additional 70 billion yuan in financing. Reuters quoted the city’s state-owned assets official as saying it had “the confidence and determination to meet the challenges.” The city’s plan also included purchases of about 3 billion yuan of idle land and housing, as well as talks to extend loans, Caixin reported. Two subsidiary stake-sale transactions totaled 12.3 billion yuan during September and October, among the support measures cited in the report.