Bank of China Plans 1st Bad Loan Securitization Since 2008

  • Plans to sell 301 million yuan of bonds backed by bad assets
  • Slowing economic growth has led to surge in soured debt

Bank of China Ltd. is planning to sell bonds backed by non-performing assets, reviving a type of financing that would give the nation’s lenders another way to remove a growing pile of bad loans from their books.

The lender plans to sell 301 million yuan ($46 million) of the debt, according to a statement Thursday. The sale, which would be the first for this type of deal since 2008, is scheduled for May 26, it said. Regulators will allow domestic banks to issue up to 50 billion yuan of such asset-backed securities, people familiar with the matter said in February.

President Xi Jinping faces pressure to help banks cut the biggest pile of bad loans since 2005 as sliding corporate profits and rising defaults worsen credit strains. Only three Chinese firms had sold bonds backed by non-performing loans before the global financial crisis forced a halt to securitization. The ban ended in 2012 with products tied to performing assets such as car financing that were so popular that China is now second only to the U.S. as a market for such debt.

The proposed bonds from Bank of China include a 234.8 million yuan senior portion and 66.2 million yuan in subordinated notes, according to the statement.

Bad Debt 

So far Chinese banks have been offloading bad debts to asset management companies, the so-called “bad banks.” Securitization can provide another way for lenders to remove soured loans from their books. The bad loan ratio among Chinese commercial banks climbed to 1.75 percent at the end of March, the highest since 2009, amid the slowest economic growth in a quarter century.

China Orient Asset Management, one of the nation’s four bad-loan managers, sold China’s first notes backed by non-performing loans in 2006. China Construction Bank Corp. and China Cinda Asset Management Co. also sold similar products before offerings were halted.

In order for the NPL securitization market to take off, China needs a national or regional database for loans, Alexander Batchvarov, head of international structured finance research at Bank of America Merrill Lynch said last month.

Chinese banks may need to raise capital for bad loan securitization, Fitch Ratings said in a report dated May 8. Bundling non-performing loans into bonds is likely to crystallize losses and potentially require banks to raise more capital to offset write-downs, the ratings company said. 

— With assistance by Qi Ding, Lianting Tu, and Dingmin Zhang

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