Bad-Debt Buyer Cinda Bonds Gain as Oaktree Bullish: China CreditDavid Yong
China Cinda Asset Management Co., the nation’s biggest bad-loans manager, has returned twice the average for Chinese dollar bonds as a stabilizing economy eases concern over the quality of its assets.
Cinda’s 5.625 percent notes due 2024 climbed 3.7 percent since they were sold on May 7 compared with a 1.5 percent gain for Chinese U.S. currency bonds over the period, JPMorgan Chase & Co. indexes show. China Orient Asset Management Co.’s 4.75 percent securities due 2018 returned 1 percent.
While Cinda has greater chance to profit after last year’s 21 percent surge in overdue loans at the nation’s 10 largest lenders, falling property prices increase the risk it will be left with a swelling pile of deteriorating assets. Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, joined with Cinda in November to tap “unique opportunities” in China’s real-estate market.
“Investors love to diversify away from the pure bank sector,” said Sean Chang, head of Asian debt in Hong Kong at Baring Asset Management Ltd. “Cinda has the skill set to pick winners with upgrade momentum, as well as the patience and holding power to generate excess returns over the long term.”
Baring, which manages $59.7 billion globally, doesn’t own Cinda bonds and will consider buying them if spreads widen, Chang said in a May 27 phone interview.
The Ministry of Finance owns almost 70 percent of Cinda, one of four asset-management companies created in 1999 to buy bad loans. Beijing-based Cinda specializes in distressed real estate. The two other AMCs are unlisted China Great Wall Asset Management Corp. and China Huarong Asset Management Corp.
China Huarong’s 6 billion yuan ($961 million) of 5.66 percent notes due 2018 have gained 5.9 percent since they were sold last November, according to Chinabond data. Cinda’s yuan-denominated 4.65 percent notes due 2017 yielded 5.219 percent on May 29, down from 5.575 percent at the end of April. China Great Wall doesn’t have any bonds outstanding.
While the AMCs enjoy state backing and benefited from buying distressed assets at cheap levels, they lack track records and could face competition if the government sets up regional operators, according to ING Investment Management Co.
“Disclosure is limited and it’s unclear how successful these asset-management companies were in resolving the distressed assets they acquired during the previous banking crisis,” Shilpa Singhal, a Singapore-based credit analyst at ING said by phone May 27. “Cinda’s bonds are trading wide for their rating, reflecting this uncertainty. We feel they don’t offer a lot of upside from here.”
Stock in Cinda is down 24 percent this year versus a 1.2 percent decline in Hong Kong’s Hang Seng Index.
While the AMCs claimed success in dealing with the 1999 bailout, they only recovered 20 percent in cash out of the 866 billion yuan in nonperforming loans they sold by the end of March 2006, according to the China Banking Regulatory Commission. Many delinquent borrowings were converted into equity stakes that have yet to be sold. The Finance Ministry in 2010 allowed the firms to extend bonds that should have been due that year by another decade.
Under a government-approved restructuring plan, Cinda marked down legacy-related nonperforming assets and liabilities to market value in 2010 as part of its transformation into a commercially viable operation, enabling the new company to book a profit when getting rid of legacy loans.
“Cinda’s bonds are safe because it’s a state-owned company and implicitly carries the credit of the government,” said Qiu Xinhong, a fund manager in Guangzhou at Golden Eagle Asset Management Co., which oversees about 11.3 billion yuan. “I wouldn’t buy its onshore bonds because the yield is too low.”
When it was established in 1999, Cinda bought 350 billion yuan of soured loans from China Construction Bank Corp. and China Development Bank Corp., according to its bond prospectus. It had 229 billion yuan of distressed assets at the end of 2013 versus 140 billion yuan in 2012. Some 8.3 billion yuan, or 71 percent, of pretax profit in 2013 was generated from loan restructuring and asset recovery, as well as from debt-to-equity workouts.
Cinda’s $1 billion of 4 percent 2019 notes yielded 3.929 percent on May 29, or 241.5 basis points more than Treasuries, according to data compiled by Bloomberg. That spread should narrow toward the 150 to 200 basis-point range on Bank of China Ltd.’s 3.125 percent notes due 2019 and Haitong Securities Co.’s 3.95 percent debt due 2018, according to CreditSights Inc.
“Cinda’s bonds are attractive on a valuation basis and the support from a high level of state ownership,” Matthew Phan, a credit analyst in Singapore at CreditSights, said in a May 23 interview. “The fundamentals are a bit more challenging, given that half of its distressed assets are related to the property market in the weaker Western part of the country.”
An official at Cinda, who asked not to be named citing company policy, said in an e-mailed response to questions it will continue to seek better, and sustainable and competitive returns.
Chinese banks had 646.1 billion yuan of non-performing loans at the end of March 31, the most since September 2008, the China Banking Regulatory Commission said May 15. The 54 billion yuan increase from Dec. 31 was the biggest quarterly jump since 2005. Overdue loans at the nation’s 10 largest lenders reached 588 billion yuan at the end of 2013, the highest since at least 2009.
Loans are turning sour as the property market cools. New-house prices rose in April in the fewest cities in 18 months, while home sales fell 18 percent from March, according to statistics bureau data. Moody’s Investors Service forecasts year-on-year sales will grow by 5 percent at most over the coming 12 months, from 27 percent in 2013. It cut the credit outlook of Chinese developers to negative from stable on May 21.
Borrowing costs are falling in China, with the yield on the benchmark 10-year government bond dropping 44 basis points this year to 4.1159 percent. The yuan has declined 3 percent to 6.2382 per dollar.
Premier Li Keqiang is easing restrictions on home purchases and the official Xinhua News Agency said in an article published on May 21 that people forecasting a crash similar to that in the U.S. were “doom mongers.” China will instead experience continued strong housing demand because of urbanization, Xinhua said.
Oaktree Capital, the Los Angeles-based fund with $86 billion in assets, was among cornerstone investors in Cinda’s $2.4 billion initial public offering in December. Following a joint-venture agreement with Cinda in November, Oaktree relocated one of its experts to Beijing, principal John Frank said on a conference call in February. Alyssa Linn, an external spokeswoman for Oaktree at Sard Verbinnen & Co., declined to comment on the venture in a May 23 e-mail.
Cinda generated 10.1 billion yuan of interest income in 2013 from assets which have been held over time for their principal value and potential interest recovery versus 3.5 billion yuan a year earlier, according to data compiled by CreditSights. The company also realized 4.2 billion yuan of gains, or more than double the book value of the distressed assets it disposed.
“Cinda looks into all sorts of loans and financings to find value in bad debt, fallen angels and distressed assets,” Baring’s Chang said. “It’s recognized as high quality and there’s a significant barrier of entry to its business. We don’t have any problem with the credit.”