China Bad Debt Prices Up 30% as New Gold Rush Gets Under Way

Updated on
  • Too many buyers are grabbing a limited supply of NPLs: Belos
  • Bain Capital, PAG bought bad loan portfolios in recent weeks

Non-Performing Loans Are China's New Gold Rush

Bad loans are rapidly becoming the latest hot commodity in China as more domestic and foreign investors rush into the market and bid up prices.

Non-performing loan prices have risen more than 30 percent this year, according to distressed investor Belos Capital Asia Ltd. The average selling price of NPLs has climbed to around 50 cents on the dollar in the past two years, from 30 cents, said Victor Jong, a partner in the deals and business recovery services unit of PricewaterhouseCoopers LLP in Shanghai. Such a high level is “very rare” in international markets, Jong said.

“There are just too many buyers grabbing a limited supply of NPLs,” said Hanson Wong, CEO of Belos Capital in Hong Kong. “At these prices, it’s pretty hard for these NPLs to be profitable.”

Distressed investors are increasing as Chinese authorities encourage market-oriented ways to resolve lenders’ mounting piles of non-performing debt amid slowing economic growth. A jump in valuations of real estate, which often act as underlying assets for secured loans, has boosted the debt’s recovery prospects. Combined with a surge in money supply, this has lifted bad-loan prices even in some less-developed regions of China, according to domestic distressed debt investor Bald Eagle Asset Management.

Foreign investors including Oaktree Capital Group LLC, Lone Star Funds, Goldman Sachs Group Inc. and PAG have bought China NPLs in the current cycle that began in 2014, according to a March report from PwC. Non-performing loans at the country’s lenders jumped 61 percent in the past two years to 1.58 trillion yuan ($231 billion) at the end of March.

In the previous NPL cleanup in China, between 2001 and 2008, secured debt was typically sold at 20 cents on the dollar, and unsecured creditors got back only 5 cents, said Wang Yingyi, a partner at Bald Eagle in Beijing.

Bain Capital

Bain Capital Credit agreed to acquire a NPL portfolio in China with $200 million in principal last month from a Chinese asset management company that it didn’t name. It will be serviced by ShoreVest Capital Partners Ltd. The portfolio had a purchase price of more than $80 million and is comprised of corporate loans, much of which are secured by various types of real-estate assets, a person close to the transaction said. A press relations officer at Brunswick Group in Hong Kong, which represents Bain, declined to comment on the transaction price and the collateral.

“There is an increased number of investors entering the market, which we view as healthy,” said Andrew Brown, Hong Kong-based partner for macro and strategy at ShoreVest, which was founded last year and is raising its first fund. Since it’s still in the early stages of the current NPL cycle, supply and demand dynamics are good, he said.

PAG bought a Chinese NPL portfolio, with more than $200 million in principal outstanding, in the past month, according to Tim Morrison, executive director for communications in Hong Kong. The borrowers of the loans are in the eastern Zhejiang province, he said in an email Wednesday.

Local investors are sometimes willing to pay higher prices, perhaps reflecting a lower returns target, or a focus on growth versus pricing as they seek to establish themselves in the early days of this cycle, he said. ShoreVest is following around 300 portfolios of live NPL transactions right now, and the volume of deals tracked in its database is increasing each month, he said. 

READ: Distressed Funds Find Treasure in China’s Mounting Bad Debts

More than 20 Chinese local-government asset management companies have been established in the past year to deal with regional bad debt, changing the dynamics of the nation’s distressed debt industry. There are now over 40 local AMCs in China, on top of the four state-owned ones.

Regulations have also been relaxed to allow local-government AMCs to sell the debt to third-party investors, which has led to more secondary transactions. Previously, those local AMCs were only allowed to work out of the soured assets themselves.

“The proliferation of new licenses to provincial asset-management companies, backed by state-owned enterprises and private enterprises alike, have led to an unbelievably crazy situation,” said Belos Capital’s Wong.

‘Brave’ Money

As local distressed debt investors proliferate, some newcomers are offering high prices that squeeze out the experienced ones, PwC’s Jong said. “The new money can be more brave.”

“The upward pressure on pricing is not just a function of the increasing numbers of market players; increasingly the banks are developing very strong in-house asset realization teams and leading their own recovery efforts directly,” said Jason Bedford, banking analyst at UBS Group AG in Hong Kong.

For Bald Eagle, the inflated prices have already posed a challenge for them to acquire more bad loans. “We will walk away when the prices are unreasonable,” said Wang. “Investment returns will likely come down when both asset prices and the cost of funding are rising.”

— With assistance by Lianting Tu, Yuling Yang, David Yong, and Jun Luo

(Adds total number of local AMCs in 11th paragraph.)
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