* Sources say IPO could raise up to $2 bln
* IPO set to provide insight into China's bad loan problems
* Cinda the most profitable of four China bad loan managers
By Gabriel Wildau and Elzio Barreto
SHANGHAI/HONG KONG, Nov 8 China Cinda Asset
Management gained approval for a Hong Kong IPO that sources say
could raise up to $2 billion, kickstarting a deal that will
offer clues as to whether the company - created for a government
bailout - can transform into a profit-driven entity.
Investors are eagerly awaiting forthcoming details from the
bad loan manager, whose fundraising is part of China's broader
efforts to recruit private capital to help clean up rising bad
debts in the financial system.
Cinda is one of four asset management companies that Beijing
established in 1999 to absorb toxic assets held by the China's
four biggest banks. It is the most profitable and the first of
the four to seek a public listing, with company disclosures
showing large and steady growth of its operations.
Fund managers and investment bankers positive about the deal
say demand for the company's services will rise in sync with the
increase in non-performing loans across the country. One banker
involved in the underwriting said investing in Cinda can also be
a hedge against China's banks, whose profit growth is slowing.
Other financiers are more bearish on the offer, pointing to
a lack of clarity about Cinda's bad loan pricing policies, its
recovery rates, and its effort to diversify into other financial
They also worry that a company set up by Beijing to clean up
financial messes may not be able to deliver steady profits.
Cinda's largest shareholder is the finance ministry, which owns
83.5 percent while the national pension fund holds about 8
"With state-owned companies there's always the risk they'll
be asked to do national service," said Chris Ruffle, portfolio
manager at Open Door Capital Group, a Shanghai-based hedge fund.
When the bad loan firms were created, they borrowed money
from the banks they were assigned to, using the cash to buy the
debt. Cinda was set up to take on the bad loans at China
Construction Bank, the country's No. 2 lender.
Hiving off the non-performing loans allowed China's Big Four
banks to restructure, with Industrial and Commercial Bank of
China becoming the first to list in 2006.
AN INTERESTING PROSPECTUS
Cinda has said its asset management business made a net
profit of 7.2 billion yuan ($1.2 billion) in 2012, a rise of 6
percent over the previous year.
It has stakes in a raft of companies obtained through
debt-to-equity swaps, including holdings in Aluminum Corporation
of China (Chalco) and China Gezhouba Group
, the main construction firm in charge of the massive
Three Gorges Dam project. It has property holdings worth at
least 2.3 billion yuan, mostly seized from companies that failed
to pay their loans.
"This is going to be a really interesting prospectus to go
through," said Mike Werner, a Sanford Bernstein analyst who
covers China's banks. "There seems to be a lot of
mis-information about the company. I think Cinda has changed
what it does over the years, but until we see the listing
documents, it's hard to say for sure."
In March of 2012, Cinda raised $1.6 billion by selling
shares in the company to four investors, which included Swiss
Bank UBS and Asia focused bank Standard Chartered
For the IPO, Bank of America-Merrill Lynch, Goldman
Sachs, Morgan Stanley and UBS are among the
underwriters on the deal, according to people familiar with the
A LOT OF BAD DEBT
Official data shows that non-performing loans at Chinese
banks stood at 540 billion yuan, or 0.96 percent of commercial
bank loans outstanding, at end-June, but most analysts believe
the true ratio is between 2 and 5 percent.
China's banking system could produce around 3.86 trillion
yuan in bad loans over the next five years, UBS banking analysts
estimated in a June 6 research report.
In disclosures related to a bond issuance last year, Cinda
promoted itself has having "deep experience in the disposal of
non-performing assets, including best-in-class pricing ability
and innovative disposal tactics via diverse channels." It
declined to comment for this article.
Since the government required Cinda to purchase most of its
bad loans at above-market prices, it remains unclear whether the
firm possesses genuine expertise in pricing the debt.
"There was never a fair and open market (for bad loans). I'm
not convinced they're particularly great at it," said Fraser
Howie, director of brokerage Newedge Financial in Singapore and
co-author of Red Capitalism, a book about China's financial
Cinda purchased 2.6 trillion yuan in non-performing loans
between 1999 and 2005, with the initial tranche worth 1.2
trillion yuan purchased at 100 percent of face value. A second
tranche in 2004 to 2005 was bought at between 26 and 50 percent,
according to Trevor Kalcic, Asia financials analyst for CIMB in
Kalcic and other analysts estimate that recovery rates for
non-performing loans acquired in that period averaged around
just 20 percent. He also notes that since 2010 new bad assets
purchased by the four asset management firms include bank loans,
corporate receivables and trust loans that have been purchased
at market rates.
All four asset management firms have gained licenses to
engage in a broad range of financial services but it is also not
clear to what extent they will develop their non-performing loan
Cinda alone has licenses for investment banking, securities
brokerage, fund management, trust, private equity, insurance,
real estate development, and financial leasing.
Cinda has said it held 7.2 billion yuan in bad loans at the
end of 2011 but has not disclosed any breakdown, causing some
analysts to worry that it still may be saddled with legacy debts
taken on between 1999 and 2005.
"That's my question if I'm investing: 'What am I actually
buying? What exposure am I getting here?'" posed Howie, the Red
Capitalism author. "That's not clear to me."