Global distressed-debt funds circle China again, eye $256bn bad-loans market

Traders eye stock prices in Beijing on the first day of trading in 2018. A massive increase in non-performing loans throughout the Chinese economy will be a key consideration for investors in 2018 as distressed debt funds move into the country. (Reuters)
Updated 05 January 2018
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Global distressed-debt funds circle China again, eye $256bn bad-loans market

BEIJING: Global distressed-debt specialists are stepping up their dealmaking in China after a decade, betting that the country is becoming serious about developing a market to tackle its $256 billion of official non-performing loans (NPLs).

Groups such as Blackstone Group and Bain Capital Credit made their first investments in recent months, amid surging write-offs by banks and indications that China’s commercial bad loans market is set to deepen.

Oaktree Capital Group last month agreed to buy a portfolio of distressed loans with a face value of 3.1 billion yuan ($476.70 million), its fifth deal, according to Tony Rao, a partner with law firm Alpha & Leader, which helped provide due diligence on the deal.

More overseas cash is set to enter the market in 2018, said Rao, in spite of rising competition with local buyers that has sent average prices above 50 cents on the dollar.
Oaktree declined to comment.

NPLs on commercial bank balance sheets officially amounted to 1.67 trillion yuan ($256.80 billion) at the end of September, or 1.74 percent of all loans. Overdue loans — those not yet technically considered bad — reached 3.4 trillion yuan. Many analysts estimate actual amounts are much higher.

Loan write-offs by commercial lenders, one indication of how deeply banks are cleaning house, jumped 50 percent to about 1.4 trillion yuan in 2016, according to estimates by UBS analyst Jason Bedford.

An initial wave of foreign interest in China’s bad loans a decade ago, led by big western banks, faded as deals failed to materialize and legal uncertainties multiplied.

But China’s distressed-debt market has become more commercialized since then. Once the monopoly of the Big Four asset management companies established in 1999 to take over bad loans from the country’s biggest lenders, the market today includes at least 55 regional managers while sales channels for bad loans now include online auctions, over-the-counter trades at local asset exchanges as well as NPL securitization.

“The market has broadened,” said Phil Groves, president of DAC Management, a China-focused alternative investment manager and bad-loan servicing company that was bought by Blackstone last year. “There’s more to buy, bigger portfolios, and different types of credit available.”

Blackstone acquired its first-ever Chinese commercial loan portfolio for $195 million in August — the same month that Bain Capital Credit did its first-ever deal with the purchase of $200 million in mostly real estate backed loans in the coastal province of Jiangsu.

Bain is now looking at other real estate-backed portfolios and building a loan servicing team to handle future deals, said Kei Chua, Bain’s Hong Kong-based managing director.

Global distressed-debt players said they’re encouraged by ongoing legal and structural changes in China — particularly in coastal regions — that has seen the emergence of professional appraisers and brokers, databases to check asset titles and liens, and greater certainty in the courts.

Foreign investors have for now mostly stuck to real estate deals because that market is better established with easily-valued collateral. Oaktree’s latest portfolio, consisting of 178 loans in China’s Pearl River Delta, is mostly but not entirely property-backed, according to Alpha & Leader’s Rao.

China’s bad loans market is, however, dominated by local distressed funds, many of which set up in the last two years, fund managers and advisers said, which has increased competition and raised NPL prices.

A national industry association set up just two years ago has grown to more than 600 members from 200 initially.

“There isn’t a national market,” said Deng Yanshan, executive director for investment at Lakeshore Capital, a domestic asset manager which oversees 2.5 billion yuan in funds. “This is still a localized business that’s based in provinces, counties and cities.”

International firms must also deal with currency controls and related government approvals — creating an execution risk, particularly on timing and hedging costs, that their local rivals do not have to bear.

But Ted Osborn, an NPL specialist partner at PwC in Hong Kong, said the outlook for global distressed asset buyers remains good.

“When China gets serious and needs to start selling big chunks of bad loans, foreigners are still the only ones with organized capital to do it.”

 


US wins WTO ruling against China grain import quotas

Updated 19 April 2019
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US wins WTO ruling against China grain import quotas

GENEVA: The United States won a World Trade Organization (WTO) ruling on Thursday against China’s use of tariff-rate quotas for rice, wheat and corn, which it successfully argued limited market access for US grain exports.
The case, lodged by the Obama administration in late 2016, marked the second US victory in as many months. It came amid US-China trade talks and on the heels of Washington clinching a WTO ruling on China’s price support for grains in March.
A WTO dispute panel ruled on Thursday that under the terms of its 2001 WTO accession, China’s administration of the tariff rate quotas (TRQs) as a whole violated its obligation to administer them on a “transparent, predictable and fair basis.”
TRQs are two-level tariffs, with a limited volume of imports allowed at the lower ‘in-quota’ tariff and subsequent imports charged an “out-of-quota” tariff, which is usually much higher.
The administration of state trading enterprises and non-state enterprises’ portions of TRQs are inconsistent with WTO rules, the panel said.
Australia, Brazil, India, and the European Union were among those reserving their rights in the dispute brought by the world’s largest grain exporter.
In a statement, US Trade Representative Robert Lighthizer and Secretary of Agriculture Sonny Perdue welcomed the decision, saying China’s system “ultimately inhibits TRQs from filling, denying US farmers access to China’s market for grain.”
If China’s TRQs had been fully used, $3.5 billion worth of corn, wheat and rice would have been imported in 2015 alone, it said, citing US Department of Agriculture estimates.
The two WTO rulings would help American farmers “compete on a more level playing field,” the USTR statement said, adding: “The (Trump) Administration will continue to press China to promptly come into compliance with its WTO obligations.”
The latest WTO panel said that the United States had not proven all of its case, failing to show that China had violated its public notice obligation under the General Agreement on Tariffs and Trade (GATT) in respect to TRQs.
China’s Ministry of Commerce said in a statement on Friday it “regrets” the panel’s decision and that it would “earnestly evaluate” the panel’s report.
China would “handle the matter appropriately in accordance with WTO dispute resolution procedures, actively safeguard the stability of the multilateral trading system and continue to administer the relevant agricultural import tariff quotas in compliance with WTO rules,” it said.
Either side can appeal the ruling within 60 days.