Global debt funds get first look at China's bad banks

Fri Sep 13, 2013 5:40am EDT

* Orient becomes first Chinese bad bank to issue dollar bonds

* Move comes as holders of non-performing loans are restructured

* Investors question foreign issuance amid rising debt in China

By Nethelie Wong

HONG KONG, Sept 13 (IFR) - China Orient Asset Management Corp on Thursday priced a US$600m five-year bond, becoming the first of China's so-called bad banks to issue US dollar debt.

Orient, one of the four asset-management companies created in 1999 to remove non-performing assets from the balance sheets of China's largest banks, follows a similar foray from Cinda Asset Management Corp, which issued a Rmb2bn (US$326m) three-year offshore bond last December.

Cinda also filed an application for a Hong Kong IPO of about US$2bn last month as it looks to sell shares to international investors.

The fundraising moves come as the asset managers are expanding their commercial operations and shifting their focus away from their earlier policy role.

Cinda has started an offshore business with a focus on helping Chinese enterprises to list in Hong Kong. Orient is expected to keep the money offshore to help build its overseas businesses.

Orient also acquired China United Insurance in November 2012, giving it a foothold into another part of the financial sector.

The commercialisation of the bad banks, however, has raised eyebrows among foreign investors, coming amid fears that bad debts are again building up in the Chinese financial system.

"From the standpoint that these are managers of non-performing loans, it begs the question: is it safe?" said a fixed-income specialist at a real money fund.

NOT FOR BAD LOANS

Orient's prospectus showed that the funds raised would go towards its commercial operations, which have been separated from its remaining policy functions by an internal restructuring.

Questions remain, however, over the role of Orient and the other asset management companies should China need to embark on another clean-up of non-performing loans.

Morgan Stanley analysts warned in late August that total debt in China had reached 221% of GDP, having jumped 75 percentage points in the past five years.

To mitigate some of the concerns, Orient, rated A-/BBB+, included a change of control put if the central government ceases to own 100% of the company.

That, for the portfolio manager, made it "a very cheap quasi-sovereign".

Indeed, Bank of China's dollar bonds due 2017 were trading at 212bp over Treasuries, or a curve-adjusted spread of about 237bp. Orient, sold at 325bp, offered almost 100bp more.

Still, early trading showed some lingering concerns. The bonds sold off in their first hours of trading today, quoted as wide as 335bp on the break.

GOVERNMENT FUNDING

The four asset management companies were established in 1999 to dispose of non-performing assets from the four largest state-owned banks after five decades of policy-driven lending to prop up growth.

Orient acquired Rmb277.3bn (US$45.3bn) of non-performing assets from Bank of China at book value in 1999, and further accepted entrustment of Rmb142.4bn of the bank's non-performing assets.

The People's Bank of China, the country's central bank, funded the acquisitions with a loan of Rmb116.2bn at an interest rate of 2.25% per annum and. Orient also issued bonds of Rmb160bn at 2.25% per annum. The bonds had a tenor of 10 years and were extended for a further 10 years at the same coupon rate in 2009.

As of 31 December 2012, Orient had disposed of Rmb228.3bn of non-performing assets from its policy-oriented operations and recovered Rm50bn in cash, achieving a cash recovery ratio of 21.90%.

The government is expected to eventually make-up for the difference. Unless foreign investors or profits from the company's new operations do it instead.

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