For­eign buy­ing jumps in China’s $1.4tn bad debt mar­ket

Gulf Times Business - - BUSINESS -

For­eign in­vestors are in­creas­ing their pres­ence in China’s dis­tressed debt mar­ket and the tim­ing for them couldn’t be bet­ter as tight fund­ing con­di­tions on­shore keep lo­cal buy­ers at bay.

In­ter­na­tional buy­ers pur­chased at least 12 non-per­form­ing loan port­fo­lios this year, up from nine last year, ac­cord­ing to a re­port by Price­wa­ter­house­Coop­ers. Spe­cial sit­u­a­tion funds from Oak­tree Cap­i­tal Group LLC and Bain Cap­i­tal Credit have boosted ac­tiv­i­ties in sourc­ing deals while DAC Fi­nan­cial Man­age­ment, a for­eign-owned NPL ser­vice provider in China, counts this quar­ter as the one of the busiest it has had.

Driven by a slow­ing econ­omy and reg­u­la­tory push for banks to recog­nise bad loans, dis­tressed debt piled up in China to $1.4tn as of June 30, the big­gest in the world, ac­cord­ing to PwC es­ti­mates. A govern­ment clam­p­down on mak­ing risky bets in fi­nan­cial mar­kets has choked fund­ing for lo­cal play­ers, creat­ing a per­fect back­drop for for­eign in­vestors to in­crease their foot­print.

“We have been field­ing many calls from for­eign in­vestors look­ing for as­sis­tance with sourc­ing and ser­vic­ing,” said Phil Groves, pres­i­dent and founder of DAC Fi­nan­cial Man­age­ment. “This will be our busiest fourth quar­ter in many years.” With at­trac­tive pric­ing and more sup­ply com­ing to the mar­ket, most for­eign in­vestors are up­beat on in­vest­ing prospects for the com­ing year.

Bain Cap­i­tal Credit (Asia) LLC, for in­stance, plans to ex­pand the size of its team on the main­land and spend­ing more time mar­ket­ing and meet­ing lo­cal as­set man­age­ment com­pa­nies, which typ­i­cally sell NPLs, said Kei Chua, man­ag­ing di­rec­tor at the firm, in an in­ter­view. Oak­tree is the most ac­tive in­vestor in China’s bad debt, it has se­cured six NPL port­fo­lios in the coun­try since 2015, lead­ing a deal league ta­ble main­tained by PwC.

The Los An­ge­les-based com­pany de­clined to comment. The world’s big­gest dis­tressed-debt man­ager ac­quired 2.4bn yuan ($346mn) of soured loans from the eastern province of Jiangsu, peo­ple fa­mil­iar with the mat­ter said in Septem­ber. For­eign buy­ers started to dom­i­nate China’s NPL mar­ket by in­vest­ment amount from late last year, and now ac­count for at least 70% of the to­tal mar­ket share, ac­cord­ing to Wu Yonghui, di­rec­tor at the Guangzhou unit of Suiy­ong Rongxin As­set Man­age­ment Co

Slid­ing de­mand from lo­cal in­vestors has pushed down over­all pric­ing on NPLs this year, par­tic­u­larly in China’s less de­vel­oped ar­eas, said Zheng Hual­ing, pres­i­dent at DCL In­vest­ments, a lo­cal al­ter­na­tive as­set man­age­ment firm.

For ex­am­ple, prices on NPL port­fo­lios in coastal province of Shan­dong have broadly dropped to 20% of the face value from 30% ear­lier this year, Zheng said in an in­ter­view. In­vest­ing in China’s bad debt isn’t de­void of risks for th­ese for­eign play­ers.

For one, the slow­down in the coun­try’s prop­erty mar­ket, which un­der­pins the col­lat­eral of most of the bad debt, could re­sult in bad banks sit­ting on loans rather than dis­pos­ing of them im­me­di­ately, ac­cord­ing to PwC.

A slow­ing econ­omy could also af­fect re­cov­ery on NPLs. “If the Chi­nese econ­omy slows dra­mat­i­cally, the lo­cal real es­tate mar­kets face ma­jor cor­rec­tions, or any other head­line risks come into play, NPL re­cov­er­ies may be de­layed beyond in­vestors’ un­der­writ­ing as­sump­tions,” said Groves of DAC Fi­nan­cial.

For now, China’s big four sta­te­owned as­set man­age­ment com­pa­nies are “ac­tively court­ing for­eign in­vestors due to their abil­ity to pay”, ac­cord­ing to PwC.

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