The age of the loans and poor paperwork for the sale may result in low offers, which may force a second auction Bids due today for Huarong Asset Management's US$3 billion in non-performing loans will probably fall short of a previous auction because of the poor quality of the assets, according to sources involved in the deal. A heavy concentration of companies in the mainland's western provinces, the age of the loans and the poor paperwork provided in the sale are expected to result in low bids, which could force Huarong to do the auction again as a result. 'They are going to have long faces when they open the envelopes,' one participant in the bidding process said. Some bidders expect about half of the assets will receive no bids at all because of the poor paperwork and the general low quality of the underlying companies and land. The auction, known as Huarong 2, is the second for the company since 1999 and will be an indication of how successfully the asset management companies are able to dispose of the US$168 billion in bad debts they were given by the four state-owned banks. The latest batch of loans was culled from 22 Huarong provincial branches and consists of assets from 1,300 enterprises. 'There is a general expectation the recovery rate will decline among the four asset management companies' because the better loans would be sold first, Fitch Ratings analyst Arthur Lau said. Even more damaging for Huarong, the assets transferred to it were from the Industrial and Commercial Bank of China, which lent money to the industrial sector. These debts had a lower value than real estate and mortgages because the loans went to ageing state-owned firms, Mr Lau said. Bidders have changed, too, with commercial banks paying to participate but some domestic funds dropping out. Huarong was reportedly disappointed with the results of its first asset sale in 2001, which earned 22 cents on the dollar if future profits were included in the total, but only eight cents in cash. In addition, similar asset sales in Taiwan and South Korea have generated more cash over time as bidders become familiar with the assets and the bidding process, which has further boosted Huarong's hopes that it will see a windfall in the next round. However, sources close to the bidding said Huarong would probably be disappointed. Unlike the first asset sale, during which Huarong disclosed its minimum bid price five days before bids were due, the company will not disclose its minimum, leaving bidders in the dark about the floor price. In addition, the paperwork on the loans is much thinner this time. This is partly because records on the non-performing loans have not been updated for several years, the state-owned factories are further down the path of disuse and defaulting borrowers are harder to track down. The new group of loans is also heavily weighted to the western provinces, which tend to have the bulk of the country's ageing state-owned factories. Excluded in this sale are companies or assets from the wealthier eastern areas, including Fujian, Jiangsu and Shanghai. A source involved in the bidding said: 'A lot of [state-owned enterprises] have social welfare costs and are sitting on administratively allocated land. Once you factor in lump-sum payments to unemployed workers and land-use allocation costs, there is a limit on the remaining cash flow.' As a result of a score of problems, it is likely that Huarong will be obliged to return to the auction with a revised plan. One alternative to coaxing larger bids out of investors is to drop the requirement for cash and accept a new payment structure. An example would be to allow investors to form co-operative joint ventures, permitting payment of future profits higher than each participating bidder's actual legal stake.