From impoverished beginnings in 1999, Cinda Asset Management, one of the mainland's managers of bad assets, rose to become the darling of investors and the embodiment of the new China investment story.
Cinda, the bad-asset arm of China Construction Bank, is poised to start pre-marketing its US$2.5 billion Hong Kong float this week, but its convoluted business model has generated a flurry of questions concerning its ownership, operating responsibilities and future exits from troubled companies.
One of the key issues at Cinda is its business model of adopting a debt-for-equity swap, which has raised questions over the firm's ownership and operating responsibilities.
A banker familiar with the deal said the model created a moral hazard and could put pressure on banks' balance sheets as some of the cash-strapped companies still had the financial ability to pay interest.
"It is a question of how and when Cinda should repay the bank that originally owned the non-performing loans," the banker said.
Under Cinda's business model, it owns the financial interest and operates the troubled companies in the hope of a turnaround. In contrast, Huarong Asset Management, another bad-asset manager that is about to close its pre-initial public offering investment, has not been involved in operating the non-performing assets, but rather sells those assets quickly.
Furthermore, the bad-asset managers will take over problem loans from state-owned lenders at prices that are not transparent to outsiders as all the assets virtually belong to the State-owned Assets Supervision and Administration Commission.
Meanwhile, the asset transfer programmes in which Cinda and Huarong acquire the bad assets of the state-owned lenders do not involve cash. Rather, they are given the task of reviving those troubled firms, which raises questions about financial interest if the bad assets turn profitable.
It is also not clear when Cinda, unlike private equity firms that are given a mandate of a five-year tenure, will exit from the investments. Nor is it clear who is eligible to acquire those state-owned assets.
A partner at a Big Four accounting firm said the mainland needed foreign capital to resolve the mounting bad-debt problem so as to mitigate the potential moral hazard of its closed-door policy.
Cinda said it had restructured 358 cash-strapped enterprises through debt-for-equity swaps by the end of 2009, with a total capital of 135.5 billion yuan (HK$172.4 billion).
Expectations for its share sale are high after institutional investors embraced its unique "counter-cyclical story" on the back of an expected increase in bad assets in the next five years as economic growth slows.
With more than half of the new listings trading below their offer price, investors are hoping Cinda will replicate the success of gaming stock Macau Legend Development, a counter-cyclical story that has doubled its price to become the best-performing new share issue this year.