Foreign distressed debt managers are watching the surge of non-performing loans on Chinese bank balance sheets for investment opportunities in a system that's long favored local managers.
According to some analysts, the stars are aligned now for foreign players to build on what has remained a negligible presence in China's NPL market, as the scale of bad loans increasingly tests the capacity of local distressed debt managers to absorb them.
It's reaching a “tipping point” where there's “enough bulk, enough opportunity” for foreign managers to begin looking seriously at Chinese NPL portfolios, said Keith Pogson, senior partner, Asia-Pacific financial services, with Ernst & Young in Hong Kong.
For PAG Ltd., a Hong Kong-based manager of private equity, real estate and hedge funds with $16 billion in assets under management, the time to strike is now — for an opportunity the firm conservatively pegs at $700 billion in bad loans to be worked out in the next four to five years.
In a July 26 interview, Eddie Hui, managing partner, absolute-return strategies, and head of PAG's China NPL push, said the success of Chinese policymakers this year in stabilizing the country's real estate market makes this an opportune time to buy NPL portfolios.
Investing in NPLs is essentially a trade on the real estate collateral underlying those loans, requiring “a strong understanding of ... what you can and can't turn into value at what point in time,” Mr. Pogson said.
Mr. Hui said he joined PAG a decade ago to build an NPL business, but focused instead on providing high-yield financing to midsized real estate developers after China's prior bad loan crisis got largely worked out by 2008.
Now NPLs have begun to look interesting again, reflecting the fallout from the 10 trillion yuan ($1.5 trillion) in stimulus money China's government unleashed to steady the economy during the global financial crisis, Mr. Hui said.
China's “NPL business has its ebbs and flows (and) the opportunity is getting more interesting again,” agreed Anil Gorthy, Hong Kong-based senior portfolio manager of Avenue Capital Group's Asia strategy.
Over the past decade, New York-based Avenue Capital has acquired more than $1.56 billion of nominal NPLs in China, representing more than 1,000 borrowers, Mr. Gorthy said.
Mr. Hui said factors providing an NPL tailwind now include:
ngrowing regulatory pressure on banks to clean up their balance sheets;
nthe fact that Chinese companies failing now are mostly small to midsize private enterprises, not state-owned enterprises;
nmoves into real estate development and other businesses by the big four “bad bank” asset management companies the government set up in 1999 to cope with China's previous NPL crisis, leaving them willing to sell more of the NPL portfolios they buy from banks to other distressed debt players; and
nthe continued maturing of China's court system in processing collateral claims.