China Bank to Turn $1.6 Billion of Bad Debt Into Securities

  • Agricultural Bank to sell securities backed by sour loans
  • Pimco analyst questions appetite for large-scale sales

Agricultural Bank of China Ltd. is planning China’s largest sale so far under a trial program for lenders to offload bad loans by packaging them up as asset-backed securities.

The lender plans to sell securities backed by 10.7 billion yuan ($1.6 billion) of nonperforming loans on the interbank bond market, it said July 22 on the Chinese bond clearing house website.

The sale price will be the equivalent of 29 percent of the loans’ face value, with the recovery rate on the debt forecast at 41 percent, the lender’s statement showed.

As corporate leverage soars and economic growth cools, China’s banks face a rising tide of bad loans. Dorris Chen, a credit analyst at Pacific Investment Management Co., said last week that the Ministry of Finance will eventually have to inject capital into the banking system, without saying when.

“At the moment, banks are doing this to test the waters rather than making it a primary way of disposing of bad loans,” said Yuan Lin, a Beijing-based analyst at BOC International Holdings Ltd. The terms are favorable for investors, the analyst said.

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The nation’s efforts to get to grips with its credit woes include debt swaps for local governments, proposals for banks to swap loans for equity stakes in companies, and the trial of the NPL-backed securities.

The China Banking Regulatory Commission said on July 15 that the NPL securities program -- so far used by lenders including Bank of China Ltd. and China Merchants Bank Co. -- will be expanded. It wasn’t more specific.

Pimco’s Chen was skeptical that large-scale sales of the securities will take place, citing investors’ likely perceptions of the risks. In the sales so far, banks have been the biggest buyers -- raising questions about how effective the deals are in cutting risks within the financial sector.

Agricultural Bank’s securities will include a 2.06 billion yuan senior tranche and a 1 billion yuan subordinated tranche, the Beijing-based lender said.

“The pilot program has gathered some momentum recently, but it still lags behind the speed of the accumulation of NPLs on banks’ balance sheets,” said analyst Yuan.

— With assistance by Jun Luo

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