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SCMP Reporter

Asset managers will not be used in the first such sale by a mainland lender as  it seeks to unload 6b yuan in bad loans

The Bank of China (BOC) is arranging the first direct public auction of non-performing loans by a mainland bank, according to  sources.

BOC will sell the loans with a face value of at least six billion yuan by April. Previous auctions were conducted through specially created asset management companies.

Sources said most of the portfolio assets were in Guangdong province, and the auction size might be raised to nine billion yuan.

While a detailed timetable for the auction has not been fixed,  it is expected to be held either next month or in April.

BOC's financial adviser, Deloitte Touche Tohmatsu, is now performing due diligence on the portfolio assets.

BOC was not available for comment yesterday. A Deloitte spokeswoman said the company was performing distressed asset work for  the bank but was unable to provide details of the auction.

Waivers and approvals will be required for BOC to proceed with the auction, as mainland banks are prohibited from disposing of bad loans at prices below their net book values. Instead, they transfer them at full face value to the asset managers,  which then resell them at steep discounts  and bear the loss.

'Depending on how they structure the deal, it could be very difficult to get a green light for the auction. It's a game of trial and error,'  one banking source said.

The auction will come just months after BOC and China Construction Bank (CCB) shared a US$45 billion bailout funded from the country's foreign reserves. Both banks are racing to  clean up their balance sheets in order to be the first to qualify for a stock-market listing - a race CCB is  expected to win.

BOC needs to cut its bad-loan ratio to less than 15 per cent of total lending to conduct a domestic share sale and under 10 per cent for an overseas listing. At the end of last year,  the bank had non-performing loans with a face value of 343.8 billion yuan, representing about 16 per cent of its loan book.

In June last year, Goldman Sachs announced its intention to establish a joint venture with Industrial and Commercial Bank of China (ICBC) that would help the country's largest bank dispose of NPLs with a face value of 10 billion yuan.

It was the first time that a mainland state bank had agreed to sell distressed debt directly, and bypassed ICBC's asset manager  - Cinda Asset Management. Goldman had earlier bought NPLs with a  value of 1.9 billion yuan from Cinda.

The Goldman-ICBC deal was followed a month later by Morgan Stanley, which announced that it was partnering CCB to dispose of bad loans with a face value of 4.3 billion yuan directly rather than go through CCB's asset manager,  Huarong Asset Management.

Unlike BOC's pending auction, however, both the Goldman-ICBC and Morgan Stanley-CCB deals were negotiated privately. Both deals have yet to receive final approvals from the government, reflecting continued official wariness over such direct transfers.

BOC's Hong Kong  unit held a similar direct auction late last year. The portfolio of  properties, with a face value of US$1.8 billion, was snapped up by Citigroup for a respectable 30 cents on the dollar because of the relative ease of taking possession and reselling assets under Hong Kong's legal system.

An auction of 22 NPL tranches by Huarong  in December was far less successful, resulting in just three transactions. Fourteen more were held over for negotiation and are expected to be completed this month, with buyers paying only between  4 per cent and  6 per cent of face value. The poor result was blamed on the poor quality of the assets backing the loans and collection difficulties.

The increasing frequency of deals sidestepping mainland asset managers  - launched in 1999 to absorb 1.4 trillion yuan worth of bad loans from BOC, CCB, ICBC and Agricultural Bank of China - raises doubts about their efficacy. China Orient Asset Management, BOC's asset manager,  has bought loans officially valued at 415 billion yuan.

The asset managers have been slow to dispose of the initial NPL tranche because of debt collection difficulties, postponing additional transfers and encouraging  direct sales.

auction notes

- The sale is expected to be held either next month or in April

- The auction size may be raised to nine billion yuan

- BOC is rushing to cut its bad-loan ratio ahead of its listing



BOC plans direct NPL auction