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

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.”

 


Easy credit poses tough challenge for Russian economy minister

Updated 18 August 2019

Easy credit poses tough challenge for Russian economy minister

  • Measures being prepared to help indebted citizens; situation might blow up in 2021

MOSCOW: New machines popping up in Russian shopping centers seem innocuous enough — users insert their passport and receive a small loan in a matter of minutes.

But the devices, which dispense credit in Saint Petersburg malls at a sky-high annual rate of 365 percent, are another sign of a credit boom that has authorities worried.

Russians, who have seen their purchasing power decline in recent years, are borrowing more and more to buy goods or simply to make ends meet.

The level of loans has grown so much in the last 18 months that the economy minister warned it could contribute to another recession.

But it’s a sensitive topic. Limiting credit would deprive households of financing that is sometimes vital, and could hobble already stagnant growth.

The Russian economy was badly hit in 2014 by falling oil prices and Western sanctions over Moscow’s role in Ukraine, and it has yet to fully recover.

“Tightening lending conditions could immediately damage growth,” Natalia Orlova, chief economist at Alfa Bank, told AFP.

“Continuing retail loan growth is currently the main supporting factor,” she noted.

But “the situation could blow up in 2021,” Economy Minister Maxim Oreshkin warned in a recent interview with the Ekho Moskvy radio station.

He said measures were being prepared to help indebted Russians.

According to Oreshkin, consumer credit’s share of household debt increased by 25 percent last year and now represents 1.8 trillion rubles, around $27.5 billion.

For a third of indebted households, he said, credit reimbursement eats up 60 percent of their monthly income, pushing many to take out new loans to repay old ones.

Orlova said other countries in the region, for example in Eastern Europe, had even higher levels of overall consumer debt as a percentage of national output or GDP.

But Russian debt is “not spread equally, it is mainly held by lower income classes,” which are less likely to repay, she said.

The situation has led to friction between the government and the central bank, with ministers like Oreshkin criticizing it for not doing enough to restrict loans.

Meanwhile, economic growth slowed sharply early this year following recoveries in 2017 and 2018, with an increase of just 0.7 percent in the first half of 2019 from the same period a year earlier.

That was far from the 4.0 percent annual target set by President Vladimir Putin — a difficult objective while the country is subject to Western sanctions.

With 19 million people living below the poverty line, Russia is in dire need of development.

“The problem is that people don’t have money,” Andrei Kolesnikov of the Carnegie Center in Moscow wrote recently.

“This is why we can physically feel the trepidation of the financial and economic authorities,” he added. Kolesnikov described the government’s economic policy as something that “essentially boils down to collecting additional cash from the population and spending it on goals indicated by the state.”

At the beginning of his fourth presidential term in 2018, Putin unveiled ambitious “national projects.”

The cost of those projects — which fall into 12 categories that range from health to infrastructure — is estimated at $400 billion by 2024, of which $115 billion is to come from private investment.