Cinda IPO unveils secrets of a Chinese bad debt factory

Updated: Tuesday November 26, 2013 MYT 7:54:26 AM

Cinda IPO unveils secrets of a Chinese bad debt factory

HONG KONG: China Cinda Asset Management Co Ltd lifted the lid on how Beijing turns bad loans from its banks into profits, issuing a prospectus for an initial public offering that has reeled in some of the world’s biggest investors. The IPO, seeking up to US$2.5bil, is set to be the largest in Hong Kong this year as sovereign wealth funds join hedge funds in betting that soured loans will be a growth business in China’s slowing economy. Cinda plans to list shares on Dec 12.It’s one of four debt collectors created in 1999 by China’s Finance Ministry to process bad loans made by the country’s biggest banks to a wide range of companies.

Little had been known about financial operations at the firms, known as asset management companies (AMCs), until a filing last year on a Cinda bond offering.

Huarong Asset Management Corp is the next AMC expected to seek an IPO, hoping to raise up to US$2bil, though no timetable has been set. Cinda’s 710-page filing shows steady growth in assets and profit in recent years.

Yet it also reveals a drop in return on equity, underlining the company’s need to diversify its lines of business. “We think the proceeds will be used to continue to diversify and grow Cinda’s investment, asset management, insurance, and other financial services,” said James Antos, banking sector analyst at Mizuho Securities Asia.

In the filing with the Hong Kong Stock Exchange, Cinda said total assets rose 11% to 283.55 billion yuan (US$46.5bil) as of June 30, versus the end of December last year. That makes it a significant player in distressed debt when stacked against global peers.

By comparison, Oaktree Capital Management, the world’s largest distressed debt manager and also an investor in Cinda, had US$79.8bil under management as of the end of September.

Cinda said one of the main ways it conducts the distressed asset management business is by buying assets at a discount and selling them later for a profit. It also conducts debt to equity swaps, where Cinda ends up owning shares of companies whose debt it owns.

The total book value of Cinda’s assets acquired through debt to equity swaps is US$7.2bil, with unlisted companies accounting for about 79%. Set up to handle the bad loans of China Construction Bank, the country’s No. 2 lender,

Cinda said profit attributable to equity holders was 4.06 billion yuan (US$667mil) for the six months ended June 30, 2013. – Reuters

Getting a Look into China’s Bad Bank

ALEX FRANGOS

Nov. 25, 2013 11:41 a.m. ET

They say it’s better to be part of the solution than part of the problem. For China Cinda Asset Management, it might be part of both.

Cinda, one of four so-called bad banks set up in 1999 to take on soured loans from China’s big state-owned lenders, is set to raise up to $2.4 billion in a Hong Kong initial public offering early next month. The pitch, encapsulated in a 700-page filing issued Monday, is that the company has become expert at snapping up distressed loans and turning them into profits. This comes as many investors think China’s banking system is once again due for a cleanup.

The trouble is, Cinda is intertwined in that banking system and shares the characteristics that have people worried in the first place. There’s breakneck credit growth, high exposure to real estate and questions surrounding sources of funding.

Cinda’s balance sheet has swelled 88% in 30 months to 283.55 billion yuan ($46.56 billion) at the end of June. A government rule change in 2010 let Cinda branch out from buying bad loans from banks to “receivables” from nonfinancial companies. These included holdings of property developers that regular banks are no longer willing to refinance.

Nearly half of Cinda’s assets are now in real estate, up from a quarter at the end of 2010. By comparison, at three of China’s biggest banks, real estate is between 25% to 30% of loans. A fourth, China Construction Bank, 601939.SH +0.45% reports real-estate exposure at shy of 10%, according to S&P Capital IQ. Cinda also holds dozens of stakes in China’s troubled coal industry, holdings that will be difficult to exit.

To fund itself, Cinda has borrowed from the same banks from whom it is supposed to buy bad debts. Cinda’s bank borrowing increased nearly 2,000% since 2010, to 161 billion yuan at the end of October from 7.8 billion yuan back then. Three-quarters of those borrowings have a maturity of less than two years. Cinda also relies on China’s volatile interbank market, which seized up in June and in recent weeks is looking like an expensive place to source funding. The company says it wants increasingly to use the bond market.

To be sure, standing alongside Cinda will be the Ministry of Finance, which will remain the largest shareholder in Cinda and a major creditor. It’s a deep-pocketed patron that in the past has given Cinda a long leash.

After Cinda wasn’t able to pay back its original funding, the Ministry of Finance agreed to share Cinda’s biggest liabilities in 2010. Cinda still owes the Ministry of Finance 33.56 billion yuan. The asset manager failed to make much of its scheduled payment to the ministry in 2011, at which time the government said it could pay that amount by the end of 2014, according to the prospectus.

It’s easy to be a skeptic of the Chinese financial system, but harder to bet against it. Many warned that China’s big banks weren’t ready to go public in the 2000s. Those who got in early, including Bank of America and Goldman Sachs, made handsome profits. In more recent years, however, share performance has suffered.

For Beijing, the upcoming IPO has the virtue of getting foreign investors to carry some of Cinda’s burden. For investors, the benefits are yet to be seen.