Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

In a country where bad debt is escalating, restructuring it should be a great gig. Yet China Huarong Asset Management, one of the four firms set up by Beijing in the late 1990s to absorb soured loans, can't seem to stop tapping the market for capital.

Last Friday, as the world watched markets plunge in the wake of Brexit, Huarong announced that its board had approved the sale of as many as 6.89 billion shares onshore, the proceeds of which will be used to replenish working capital and develop major businesses. The raising comes just eight months after Huarong's Hong Kong initial public offering.

That stock sale did wonders for Huarong's capital adequacy ratio. Prior to its IPO, the ratio had dropped to 12.83 percent, just shy of the nation's regulatory minimum of 12.5 percent. It rose to a more healthy 14.75 percent after the event, in time for the year-end report such financial institutions are obliged to send to Chinese authorities.

What a Difference an IPO Makes
At the end of June last year, prior to Huarong's Hong Kong IPO, the company's capital adequacy ratio had dipped below 13 percent
Source: Company filings
* Mid-year numbers are only available for 2015.

Investors can expect that capital replenishment to become commonplace, considering the rate at which Huarong and its peers are taking bad loans off lenders' balance sheets.

As well as beefing up capital, Huarong and China's other so-called bad banks are developing creative solutions to get assets off their books. Huarong said in its 2015 annual report that: 

"We also made breakthroughs in adopting a 'capital-light' business model through the development of securitization of distressed assets and establishment of funds focused on distressed assets."

This capital-light strategy deserves a whole separate discussion.  In spite of it, however, shareholders can expect to see asset-management companies make many more trips to the stock exchange, cap in hand. The firms may also resort to selling subordinated bonds that count toward capital to replenish their coffers. China Cinda Asset Management has already done that.

Step Up
The amount of assets classified as receivables, or bad loans, held by China's two biggest asset-restructuring companies has almost quadrupled in three years
Source: Company filings

If the business of restructuring bad debt wasn't enough of a drag on capital, now there's also the need for money to diversify into areas such as fund management and banking. Fitch said in April that Cinda's HK$68 billion ($8.8 billion) 2015 purchase of Nanyang Commercial Bank will probably put a strain on financial ratios.

The bottom line is that investors shouldn't be too fussed if they don't get to participate in the next share issue from a Chinese asset-management company. With the sheer amount of bad debt they're guzzling there are sure to be more opportunities in future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Packaging up assets that are already bad and selling them to investors. What could possibly go wrong?

To contact the authors of this story:
Christopher Langner in Singapore at clangner@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net