Distressed funds seek to tap debt load in China
Potential for bad loans grows as corporate borrowing tops the US to reach US$14.2 trillion
Distressed-debt funds are raising cash to seek greater opportunities in China, where Standard & Poor's says corporate borrowing topped the United States last year.
Planned commitments to funds investing in Chinese and other Asian troubled assets were set to surpass US$2 billion this year, up from US$303 million last year, data from researcher Preqin showed.
Morningside Group Holdings in Hong Kong planned a US$103 million vehicle, Preqin said.
Guangzhou-based Shoreline Capital Management was seeking US$500 million for its third distressed-debt fund, co-founder Ben Fanger said.
China's economic growth had slowed to the least in more than a decade even as companies increased debt to US$14.2 trillion by December 31, surpassing the US$13.1 trillion in the US, an S&P report showed. Non-performing loans jumped the most since 2005 in the first quarter and state-owned asset management companies are raising funds to help clean up lenders' balance sheets.
"Now that China is facing slowing growth and the banks are selling bad loans, distressed opportunities have multiplied," said Fanger. "We have begun investing in [non-performing loans] again, as well as rescue and bridge financings."
Distressed-debt funds operating in China face a market dominated by four so-called bad banks that enjoy state backing. The government set up China Cinda Asset Management, China Orient Asset Management Corp, Huarong Asset Management and Great Wall Asset Management Corp in 1999 to help rid the banking industry of 1.4 trillion yuan (HK$1.74 trillion) of non-performing loans.
Cinda had 229 billion yuan of distressed assets at the end of last year, up from 140 billion yuan in 2012, its bond prospectus said. About 8.3 billion yuan, or 71 per cent, of pre-tax profit last year was generated from loan restructuring and asset recovery, as well as from debt-equity workouts.
China's 4 trillion yuan stimulus that began in 2008 to deal with the fallout of the global financial crisis caused a record build-up of debt and inflated property bubbles. That credit boom "sowed the seeds of the [non-performing loans] that are now being transferred from the banks' balance sheets", Fanger said.
Premier Li Keqiang has sought to rein in credit expansion, particularly in the off-balance-sheet shadow banking industry, by tightening lending and curbing real estate price speculation.
Non-performing loans rose by 54 billion yuan in the first quarter to 646.1 billion yuan, the highest since September 2008, the China Banking Regulatory Commission said last month. That was 1.04 per cent of total lending, up from 1 per cent at the end of last year.