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.”

 


At Davos, innovative products point to a sustainable future

Updated 24 January 2020

At Davos, innovative products point to a sustainable future

  • A single tree that to bear 40 different types of apple

DAVOS: The World Economic Forum is not all about the fourth industrial revolution or the rise of AI.

You can also find all manner of strange and intriguing products on display from biodegradable plastic made from algae to wallpaper made from recycled corn husks.

One stand titled “How do you design a tree?” is part of a conservation effort where a single tree is designed to bear 40 different types of apple.

Another stand displays colored seaweed on a rack, showing how clothes can be dyed in a sustainable, non-chemically corrosive manner.

Propped along a large wall is Fernando Laposse’s wallpaper made of variations of purple corn husks that are reinforced with recycled cardboard and cork to create wallpaper and furniture. The husks come from corn that needs very little water and can be grown in the desert, which makes it all the more sustainable.

“This initiative helps the local economy as it brings in jobs and a resurgence of crafts and food traditions while also ensuring sustainability,” Laposse said.

Another display shows a machine that extracts pellets from a mixture of algae and starch and is used to create a thread that is the base of 3D printing. These sustainable, biodegradable plastics made from algae are being experimented with in different regions.

With the rise of deep fakes — a branch of synthetic media in which a person in an existing image or video is replaced with someone else’s likeness — another stand delivers a warning on the looming dangers of unregulated software.

The Davos forum prides itself on its sustainability, and key topics have included climate, mobility, energy and the circular economy. Everything is recyclable, and participants must download an application in order to keep up with the program and any changes — a move to cut down on paper waste.