Huaxin Trust struggles as corporate debt problems turn into shadow banking
The wave of financial distress The flooding of the Chinese corporate sector spills over to a key funding channel in the shadow banking sector – the trust industry.
Huaxin Trust Co. Ltd., one of 68 companies licensed to operate in trust business, attempts to raise up to 6.8 billion yuan ($ 1 billion) from strategic investors as it faces a growing liquidity shortage that has already forced it to ignore repayments of dozens of investment products in recent months.
The institution based in Dalian, Liaoning Province ad (link in Chinese) Tuesday that it is looking for one or more strategic investors to inject 3.4 to 6.8 billion yuan into the company, which would increase its share capital from 10 to 13.4 billion yuan.
But what caught the attention of the market was a condition stipulated by Huaxin that any investor should agree to “support the liquidity of the company before making its investment to allow the company to protect the interests. investors in its trust products â. A seasoned trust industry source told Caixin that it can be difficult to persuade strategic investors to provide liquidity support even before they make their investment, although investors can use this as leverage to gain leverage. best conditions.
Chinese regulators are increasingly concerned about the hidden risks of the fiduciary sector, which plays an important role in the shadow banking sector by providing loans to high-risk companies and those who have difficulty obtaining credit from banks. traditional. The loans are bundled into high yield products which are then sold to retail investors and institutions. The China Banking and Insurance Regulatory Commission (CBIRC) is preparation of regulations to put the country’s $ 3.1 trillion fiduciary industry under closer scrutiny. The draft rules, which were submitted for public comment in May, will govern how trust companies manage client funds, clarify requirements for trust products, and strengthen the regulation of their loan-related investments.
In June, the CBIRC asked some trust companies to scale back their trust fundraising activities in line with bespoke specifications provided by the regulator, multiple sources told Caixin. Unofficial orders from the regulator followed an increase in demand for loans as businesses rushed to find money to help them weather the impact of the Covid-19 outbreak or to pay off incoming loans due.
Regulators Turn the Screws on Trust Funding as Risks Rise
Huaxin Trust, which has around 20 shareholders, is controlled by a private company registered in Beijing called Huaxin Huitong Group Co. Ltd. whose low-key chairman Dong Yongcheng owns a 9.1% stake in the trust company, according to company data. Qichaha supplier. The second and third shareholders of Huaxin Trust are both related to Dong’s company. Huaxin Huitong held a 60% stake in Huaxin Trust in 2015, according to a Hong Kong stock exchange filing by Shengjing Bank Co. Ltd., which is based in northeastern Liaoning Province and was negotiating to buy a 20% stake in the trust for 3.2 billion yuan. The deal then broke down.
Huaxin’s investor hunt comes as it struggles to pay on maturing trust products amid increasing stress on its corporate borrowers. As of Thursday, the trust company had repaid just four recently matured products and extended the repayment of 23 products, with the first maturing in September, according to its website. Huaxin Trust said in advertisement (link in Chinese) on its website that the companies had failed to repay the principal and interest on the products, forcing the company to extend repayment dates as allowed under the terms and conditions of the trust products sold to investors.
The company also mentionned (link in Chinese) that in addition to seeking strategic investors, it is accelerating its efforts to get rid of some of its underlying fiat assets and its own assets Any money raised through these sales will be used to reimburse investors in its trust products.
There has been growing speculation that Huaxin Trust may have had funds embezzled by its largest shareholder, but the company released a declaration (link in Chinese) on November 10, denying that its major shareholder had used or embezzled company funds and claiming that Huaxin Huitong “continued to provide cash support to help the company.”
Huaxin Trust is the latest trust company to run into trouble in an industry already reeling from the effects of a crackdown on shadow banking and an economic downturn exacerbated by the coronavirus pandemic. Among them are Sichuan Trust Co. Ltd., which has did not reimburse the investors over 20 billion yuan, and Shanghai-listed Anxin Trust Co. Ltd., once the darling of the trust industry, which collapsed last year and turned out to have a 50 billion yuan black hole on his books.
At the end of last year, Huaxin Trust managed around 61.6 billion yuan in trust assets, according to its 2019 annual report. report (link in Chinese), but that figure had fallen to around 49.2 billion yuan by the end of June, according to Tuesday’s strategic investment statement.
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