Investors sold off Huarong's offshore bonds last week, driving up yields, as they fretted over the delay of the company's 2020 earnings due to unspecified "relevant transactions".
Some worried that debt restructuring at one of China's four biggest state-owned bad-loan companies could affect its ability to make payments on offshore bonds worth more than $22 billion.
"There is fear because in China the odds are very often binary," said Michel Lowy, CEO of SC Lowy, an asset manager focused on high yield to distressed credit, special situations and regulated financial institution turnarounds.
"In other, more sophisticated markets, your range of recovery may be 50-80 cents. In China's it's par or 20 cents."
On Friday, China's banking and insurance regulator said that Huarong is operating normally and has adequate liquidity. Subsidiary Huarong Securities Co Ltd subsequently repaid a maturing 2.5 billion yuan ($384.83 million) bond, it said in a post on its official WeChat account.
By Tuesday, the yield on a $850 million April 2027 bond issued by Huarong Finance 2017 Co Ltd was quoted at 8.17% after peaking at nearly 17% on Thursday, as fears ebbed.
While few investors question Huarong's ability to repay its onshore debt, regulators have asked banks not to withhold loans to the company as part of measures to stabilise its cash position.
Worries around Huarong have centred not just on possible losses for bondholders, but on what a default would mean for risk assessments and pricing of debt issued by state-owned enterprises (SOEs). Some investors now say those worries were overdone.
"I think we need to take a more measured approach to headlines like this," said Mervyn Koh, a portfolio manager at Janus Henderson Investors. "Overall we tend to give the central government the benefit of the doubt" in its handling of SOE defaults, he said.
Investors are nevertheless keeping a close eye on Huarong ahead of the April 27 maturity of a S$600 million ($452.18 million) bond issued by subsidiary Huarong Finance 2017 Co Ltd.
The mid price on that bond was last quoted at 97.5 cents, up from 92 cents last week. A portfolio manager in Hong Kong said investors are demanding a slight discount due to lingering uncertainty.
"It will be critical that the events around Huarong are handled credibly as foreign capital and treatment of investors will be watched with great interest by all," said Brian Kloss, portfolio manager at Brandywine Global.
Larry Hu, chief China economist at Macquarie, said in a note that investors need not worry much about systemic risks posed by Huarong, but that it could signal market turbulence ahead.
"The stress caused by Huarong is likely to be the beginning of a series of credit events," he said.
($1 = 1.3269 Singapore dollars)
($1 = 6.4963 Chinese yuan)
(Reporting by Andrew Galbraith in Shanghai; additional reporting by Kate Duguid in New York; editing by Ed Osmond, Larry King)
By Andrew Galbraith