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SCMP Reporter

Slow deal flows, confusing procedures may force them to look outside China

Foreign investors may abandon China's non-performing loan (NPL) market if deal flow does not pick up substantially in the coming year, according to international accounting firm PricewaterhouseCoopers (PwC).

'We believe the biggest issue facing China's NPL sellers today is whether they can modify the current system sufficiently to entice the foreign investment community to stay in the market,' PwC said in a report released yesterday.

A PwC survey of 17 international investment banks, distressed debt funds and other firms  indicating an interest in Chinese NPLs  suggests that foreign investors have earmarked a combined US$10 billion to US$15 billion for China's NPL market  in the next three years.

Some 71 per cent of respondents  see opportunities increasing  as state-owned asset management companies (AMC) and mainland commercial banks put more problem loans up for sale.

A total of 94 per cent of respondents hope to remain in the market for at least five years.

'[However,] during the three-month period between survey completion and today, many of the respondents appear to have changed their tune,' PwC said. 'In many of our discussions with them, their optimism has turned to pessimism over the dearth of opportunities in the market.'

Only US$6 billion  in  banking NPLs have been sold to foreign investors so far, including the US$1.8 billion in BOC Hong Kong NPLs acquired by Citigroup last year.

Should the paucity persist,  foreign investors may turn instead to mature markets such as Japan and Korea, or newly emerging markets such as Germany and Eastern Europe, where the pace of NPL activity  is more predictable.

'They are all commercial enterprises,' said Ted Osborn, PwC's Hong Kong-based business recovery services partner. 'They have all got returns to  make and targets to meet.'

With an estimated  US$500 billion  in problem bank loans, China is Asia's second-largest NPL market after Japan.

In September, US-based Lone Star, one of the bigger international buyout firms,  closed its Beijing office due to the shortage of deals.

Apart from the small, unpredictable deal flow, foreign investors have also shown  concerns about unclear government approval process, confusing internal approval requirements at state-owned AMCs, and the tendency of  the AMCs to renegotiate  terms after the initial   deals have been signed.

The  central government earlier this month announced a new policy to streamline approval procedures for NPL sales to foreign investors. But its impact on speeding up the deal flow remains to be seen, Mr Osborn said.

Foreign investors generally prefer large and medium-sized NPL portfolios, secured by land or real property, acquired through private  deals rather than public auctions. Hotels and operating manufacturing companies are preferred over service and trading firms.

Portfolios concentrated in  the affluent coastal provinces and cities such as Guangdong, Beijing, Jiangsu, Shanghai and Zhejiang are deemed most attractive.

Foreign investors  demand an internal rate of return of 21 to 30 per cent from their mainland NPL investments,  far more than most NPL sellers are willing to  guarantee.

Despite uncertainties in the primary NPL market, Mr Osborn sees a promising secondary market emerging, as domestic investors that have bought NPL packages  offload  those assets falling outside their core businesses.



Foreign firms change tune on NPLs