BOC sells bad loans worth US$1.8b
Citigroup snaps up debt portfolio shed ahead of the bank's Hong Kong listing and pays 30 cents on the dollar
Citigroup has won a landmark auction of non-performing loans by the Bank of China, snapping up a loan portfolio with a face value of US$1.8 billion for 30 cents on the dollar.
The US banking giant will pay between US$500 million and $600 million for the loans, which were transferred from BOC Hong Kong (Holdings) to a Cayman Islands company in preparation for BOCHK's listing last year, according to sources close to the deal. The transfer was made to improve BOCHK's balance sheet quality and enhance its listing prospects.
'We are very pleased to have been selected for the transaction and view favourably opportunities in this area, particularly in China and Hong Kong,' said Joseph Draper, managing director at Citigroup Global Markets Asia.
Mr Draper declined to comment on the price of the deal. Executives at Bank of China and UBS, which organised the auction, did not return phone calls yesterday.
The portfolio's sale is seen as a key barometer as China's largest state banks prepare a series of massive disposals of non-performing loans (NPLs) in an effort to clean up their books for future domestic and overseas listings.
The Bank of China portfolio included loans advanced to about 450 companies in Hong Kong and China. According to bankers participating in the auction, many of the loans were backed by Hong Kong properties.
Citigroup's bid, representing between 27 and 33 per cent of the face value of the portfolio, was estimated to be about 15 per cent higher than the bids of three rivals - Goldman Sachs, Lehman Brothers and a joint bid from Merrill Lynch and Standard Chartered.
'[Citigroup's] bid was very aggressive,' said a banker at a competing bidder. 'They are speculating on the property prices [of the mortgaged properties] and must have built in an appreciation in the properties' value. It is not common for [NPL] bidders to bet on the collateral appreciating in value.'
China's first NPL sale was organised in 1999 by Huarong Asset Management, a company set up to dispose of NPLs for Industrial and Commercial Bank of China.
While Huarong officials initially indicated that the NPLs fetched about 20 per cent of their face value, one of the buyers, Morgan Stanley, is believed to have paid as little as eight cents on the dollar.
The premium Citigroup was willing to pay for Bank of China's portfolio over the Huarong sale is partly explained by the fact there is considerably less risk involved in taking possession of collateral in Hong Kong than on the mainland.
The NPL portfolio secured by Citigroup from Bank of China was divided into two pools, one with a face value of HK$3 billion stemming from loans made to a private group of companies. The other, with a face value of HK$11 billion, originated from loans extended to 274 corporate groups. According to banking sources, companies that defaulted on the loans included Hong Kong travel and property firms, some of which are listed on the local stock exchange.
The transaction is expected to be formally completed next month.
