Banking & Finance

China presents opportunity for distressed debt manager Oaktree as bad loans pile up

  • Rising NPLs in China make it an attractive investment option, says Oaktree’s Howard Marks
PUBLISHED : Sunday, 28 October, 2018, 6:44pm
UPDATED : Sunday, 28 October, 2018, 10:38pm

Oaktree Capital Group, one of the world’s largest alternative investment firms, says it will continue to invest in distressed debt and equities in China where non-performing loans are piling up amid slowing economic growth and declining stock markets.

For Howard Marks, co-chairman and co-founder of Los Angeles-based Oaktree Capital, rising non-performing loans in China and improved legal infrastructure made it attractive to invest in Chinese NPLs.

“First of all there are a lot of NPLs. The more there are, the more we have to select from, and I think there’s a higher probability that we’ll get an attractive price,” he said during a visit to Hong Kong last week.

Chinese banks’ bad loans have been rising this year and stood at 1.96 trillion yuan (US$282 billion) at the end of the second quarter, according to the latest available data from the China Banking and Insurance Regulatory Commission.

Beijing’s crackdown on shadow banking to tame risks in the financial system has made banks wary of extending new loans and refinancing loans for smaller companies, deepening the bad loans situation.

Marks’ views echo what Oaktree CEO Jay Wintrob told Bloomberg in April. Wintrob said that the distressed debt investor was looking to allocate more capital to China on expectations that more investment opportunities will arise as banks clean up their balance sheets, having completed five non-performing loan transactions in the country at the time.

Marks also said Oaktree Capital was “actively investing in Chinese equities” despite the benchmark Shanghai Composite Index falling some 21 per cent so far this year.

Chinese stocks have taken a beating because of the ongoing trade war with the US and the consequent slowdown in economic growth. Third-quarter growth came below expectations at 6.5 per cent.

“Psychology plays a very important part in the Chinese market and I think at the present time, it is very negative. Some of it is a genuine reaction to negative events like slowing growth, global tensions, and some of it is probably a strong emotional reaction and perhaps an overreaction,” Marks said.

“When you find a market and you have negative events, and negative psychology then that is a good starting point to search for value.”

Besides China, Marks said Oaktree was also looking to invest in Japanese equities, emerging market debt, and in Turkey.

As of September, Oaktree had US$124 billion in assets under management, 71 per cent of which was in credit. By geography, 70 per cent of these assets were in the Americas, and only 13 per cent was in Asia-Pacific.