* $500 bln bond to increase funding in event of more bad debt as economy slows
* Bulk of Cinda distressed debt portfolio in real estate
* Offer comes after nearly $3 bln fund raising in December
* Investors concerned about Cinda’s resilience as debts mount (Adds analyst comments, details from prospectus)
By Saikat Chatterjee and Lianting Tu
HONG KONG/SINGAPORE, May 5 (Reuters) - China’s only listed bad debt management firm Cinda Asset Management is offering bonds worth at least $500 million as it seeks to boost funding in anticipation of a spike in bad loans as economic growth slows.
Two fund managers who attended a company presentation on Monday told Reuters Cinda, the most profitable company among the four bad loan managers set up by China’s government a decade and a half ago, was courting investors in Hong Kong, Singapore and New York this week for its first U.S.-dollar denominated debt.
An asset portfolio focused on low-cost real estate helped keep Cinda profitable, a bond prospectus seen by Reuters showed.
But investors are worried that Cinda, which has seen its asset quality decline in the past three years as the economy slowed, may not be able to maintain profit growth as corporate debts mount and China’s government allows more companies to default.
Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120 percent of GDP - according to estimates by ratings agency Standard & Poor‘s.
A recent Thomson Reuters analysis of 945 listed medium and large non-financial firms also showed total debt soared by more than 260 percent between December 2008 and September 2013.
“A big concern among investors is the sustainability of the profit growth rate as both return-on-equity and return-on-assets has been declining in the past three years,” said one of the fund managers who attended the presentation.
“Also the valuation of assets on Cinda’s books can be a bit opaque as there is usually no market price for distressed assets,” the fund manager added.
All the investors declined to be named as they are not authorised to speak to the media. Cinda officials were also not available to comment.
Cinda’s distressed debt assets grew more than six times from end-December 2011 to reach 114.36 billion yuan ($18.27 billion) in 2013, the prospectus showed, but its return-on-equity dropped from 18.1 percent to 13.8 percent during the same period. Return-on-assets also fell to 2.9 percent in 2013 from 4.2 percent in 2011, the document showed.
Ratings agency Moody’s Investor Services has already given the planned bond issue a “Baa1” investment-grade rating, but it said a substantial economic slowdown and weakened government support may be detrimental to asset quality.
China’s economy grew at 7.4 percent between January and March, its slowest pace since the third quarter of 2012.
The slowdown has spurred Chinese banks to bolster their non-performing loan ratio to its highest level in two years in the last quarter of 2013, as analysts expect a further worsening of asset quality this year.
The planned bond offer also appears to be part of Cinda’s contingency plans, as it recently raised nearly $3 billion in equity and debt, including a maiden 2 billion yuan offshore bond in December.
“These funds are for working capital requirements which means they expect a spurt in bad loan growth,” said an analyst at a hedge fund who attended the investor meeting in Hong Kong.
Bank of America Merrill Lynch, BOC International, Morgan Stanley, UBS and Credit Suisse are the joint global co-ordinators for the deal.
Cinda is one of four asset management firms the government established in 1999 to absorb toxic assets held by China’s four biggest banks and is two-thirds owned by the finance ministry.
Analysts said the large government holding puts Cinda in a prime position to take advantage of any spike in non-performing assets.
Cinda’s own asset book is also seen as relatively strong compared to its peers because of its substantial investments in urban developments that offer low-cost housing and not the expensive residential properties that have taken a hit in recent months due to tighter credit and the economic slowdown.
As of December 31, real estate formed 60 percent of its distressed debt portfolio, followed by leasing and commercial services, the bond prospectus showed. Utilities and manufacturing companies accounted for the rest.
Cinda has bad debt exposure to the larger property companies such as Vanke, Greentown China Holdings and Greenland Group, said another fund manager who attended the meeting. ($1 = 6.2593 Chinese Yuan) (Additional reporting by Umesh Desai and Neha D‘silva in HONG KONG; Editing by Miral Fahmy)