BMW’s China partner faces mounting debt woes

There’s mounting scrutiny over the state-owned parent of BMW AG’s joint venture partner in China, Brilliance Auto Group Holdings Co. Investors are increasingly concerned about the Liaoning-based firm’s capacity to juggle its debt load as the pandemic weighs on profits.

What’s happening:

Concern is growing about the financial health of Brilliance Auto, the parent of Hong Kong-listed Brilliance China Automotive Holdings Ltd., which manufactures vehicles with the German carmaker in China via a joint venture.

Speculation has been building that the group will struggle to service its liabilities after its banks set up a creditor committee to coordinate claims on the company’s debt. The group needs to repay 1.37 billion yuan ($200 million) in outstanding local bonds this year, Bloomberg-compiled data show.

Brilliance Auto, also known as Huachen Automotive Group, saw one of its onshore bonds tumble 35% in interbank market trading Thursday to a record low amid rising doubts about its repayment ability. That sent Brilliance China Automotive’s stock price plummeting on the same day.

Why does it matter:

The financial health of key operators in the world’s largest car market is closely watched by global and domestic investors, particularly as leveraged firms wrestle with the pressure from the pandemic and weaker domestic consumption.

After several high-profile defaults among state-linked borrowers, there’s also rising interest in the level of government intervention faced by such firms and the fallout for international companies with ties to them.

Brilliance Auto has already agreed to sell some of its shares in the Hong Kong-listed subsidiary to another Liaoning state-owned firm. With the possibility of further stake sales on the horizon, future ownership of this prominent unit remains unclear. What’s more, the unit is also set to give up control over its joint venture with BMW by 2022, a crucial source of earnings for the group.

What’s the company:

Brilliance Auto’s history dates back to 1949 when the People’s Republic of China was founded. It is one of the largest state-owned firms in the northeastern province, employing 47,000 people. It has four publicly listed companies in Hong Kong and Shanghai, and about 160 units either wholly or partially owned, according to information on its official website.

Brilliance Auto earned 11 billion yuan in net profit in 2019, up 12% from a year ago, thanks in large part to contributions from the joint venture with BMW, according to its latest annual report.

What does the company say:

The automaker said it has repaid all bonds that have matured without any default, according to a statement released late Tuesday. It added that its operations remain normal and it will continue to fulfil its debt obligations.

Calls to Brilliance Auto’s information disclosure office went unanswered.

What do ratings agencies say:

Brilliance Auto has low profitability and relies heavily on its joint venture with BMW, according to a June report by Golden Credit Rating International Co. In addition, sales from the joint venture are expected to fall this year with the pandemic crimping demand, said the Chinese ratings firm.

What are traders watching next:

Investors are now more focused on Brilliance Auto’s capability to honour its debt repayment in the next two years, with most of its longer-dated debt hit by slumping prices.

Market participants are also closely monitoring whether the automaker can keep to its word that it will have no problem repaying its bonds due before March, as reported by Chinese local media.