Bad Debt Prices Soaring in China, But Big 4 AMCs Under Pressure

21st Century: 万亿不良资产市场“看起来很美” 四大AMC的盈利压力与隐忧

After the banks' non-performing assets were brought to the market in 2014 on a large scale, the price of non-performing asset packages was basically maintained at about 30% of the original value. After 2017, the prices of similar non-performing asset packages are increasing. The actual package price of assets in the first half of 2017 is about 40% to 50%, and the transaction price of some asset packages exceeds 60% in the second half of the year, and some even reach 70% to 80%.

In recent years, with the increase in non-performing assets of the banking industry, financial asset management companies (AMCs), which are mainly engaged in the disposal and disposal of non-performing assets, have developed rapidly. At the same time, local AMCs, private investors, private equity funds, etc. have also poured in one after another, trying to share a share of the trillions of bad asset markets.

On the one hand, the influx of funds from all directions, the direct result is to push up the price of non-performing asset packages, further reducing the AMC's profitability. On the other hand, after the commercialization transformation, AMC needs to raise funds through marketization. The recent rise in capital prices has also aggravated the cost pressure of AMC.

Bad debt prices are rising, the AMCs bought during the low points in late 2014 and into 2016, now they can unload at good prices, raise capital and wait for the next round. "Costs are rising" means there aren't enough bad assets following a wave of credit creation and rising optimism.

Here comes a splash of cold water.

Just as an AMC employee told the 21st Century Business Herald reporter: "The bad acquisitions and disposals need to be cross-cycle, generally buy a lot of bad assets in the economic down cycle, dispose of them in the up economy, and get through this cross-cycle operation method. In the past 5 years, the macro economy has been in a downtrend channel, and AMC has bought more and retired less, there is bound to be profit pressure."

Bad debts are piling up during the credit infused recovery?

It is precisely because of this that AMC has to develop debtor services to become its stable source of income and profits, but the risk has also come. A person in charge of the AMC business department frankly admitted to reporters from the 21st Century Business Herald: “In the past, when doing debt service, it was profitable to accept financial consulting fees and profit, but it did not consider risk factors, such as making provisions and losses. The economic downturn has caused problems in debt-type projects and it is difficult to make profits."

A partial breakdown of Cinda and Huarong follows:

In 2017, Cinda’s total revenue was RMB 120 billion, of which, receivables of non-performing assets of receivables were RMB 17.773 billion, and changes in the fair value of non-performing assets were RMB 8.266 billion, which totaled RMB 26.039 billion, accounting for only 21.69% of the total. Together with the debt-to-equity assets investment income, net proceeds from disposal of repossessed assets, and other custody clearing, restructuring services commissions and fee income, etc., a total of 40.191 billion yuan, accounting for 33.5% of total revenue.

At the same time, the company’s other investment income was 29.465 billion yuan, net premiums earned were 192.67 yuan, and interest income was 20.64 billion yuan. It can be seen that the income from various financial services such as securities, insurance, banking, and financial leasing has become an important source of Cinda's income. According to official data, non-performing assets accounted for “half of the country’s total”, and bad business accounted for 57.7% of pre-tax profits.

Similar to Huarong, Huarong's total revenue in 2017 was 128 billion yuan. The receivables of non-performing assets of receivables were 30.753 billion yuan, the change in the fair value of bad debt assets was 4.661 billion yuan, the interest income was 21.015 billion yuan, the investment income was 441.79 yuan, and the revenue from non-performing assets business operations accounted for 27.67%.

The previous operating income of non-performing assets of Huarong officials was 68.912 billion yuan, accounting for about half of the total. It also includes debt-to-equity assets business, trust agency business based on non-performing assets, non-performing asset management business carried out by subsidiaries, special opportunity investment business based on non-performing assets, and real estate development business based on non-performing assets.

In terms of capital cost, Huarong’s short-term borrowing rate is 1.65% to 9.00%, and the long-term borrowing rate is 2.00% to 9.50%, respectively.

In addition, given the low cost of financing in overseas markets, Huarong has issued bonds on a large scale overseas. From 2013 to 2017, Huarong issued a total of financial claims and secondary capital bonds of 106 billion yuan, and Huarong International's subsidiaries also had 12 billion US dollars of bonds.

Cinda and Oriental Capital have similar financing conditions. As of the end of 2017, Cinda's bonds payable was 202.4 billion yuan, loans were 580.4 billion yuan, and deposits were 226.2 billion yuan. Cinda parent company fixed loan interest rate is 3.6% -7.06%, floating loan interest rate is 4.75% -4.85%. The short-term loan from the East is 133 billion yuan, the annual interest rate is 1.96%-7.5%, and the bond payable is 130.2 billion yuan. The long-term loan is 177.9 billion yuan, and the interest rate is 2.7%-7%. Great Wall has not released its 2017 performance report yet. It has not publicly disclosed relevant data.

In April this year, the East also announced that it has introduced four strategic investors, including the National Social Security Fund, Telecom, China National New Capital, and Shanghai Electric Group, with a combined total equity of RMB 18 billion. At present, the Great Wall is also in the lead.

The local AMC situation has taken a step. A local AMC personage told the 21st Century Business Herald reporter that “Compared with the Big Four, the local AMC’s funding channels are narrower, mainly capital funds and bank loans. There are also some AMCs trying to develop asset and equity financing methods, but they are It is very small. Compared to the regular army, the cost of funding for private organizations is higher, 15% is a common situation, and some even exceed 20%.”

AMC people also believe that the bank itself has a lot of non-performing asset disposal methods. The pressure for external transfer is mainly from regulatory compliance and assessment pressure. The advantage of AMC lies in its flexible approach, which can be transferred in a premium and can also hold these assets for a long period of time. The key factor is the cost of capital, and the current funds are mainly short-term funds, which are difficult to match with the cross-cycle disposal methods.

Related

SCMP: China’s local bad-asset managers drift from policy mandate

Chinese Banks Not Interested in Debt for Equity Swap; Bad Debt Firms Circle

Bloomberg: China's Large Banks Wary on Li Keqiang's Plan for Bad Loans

Asked about the plan at the Boao Forum last week, China Construction Bank Corp. Chairman Wang Hongzhang said he needs to think of his shareholders and wouldn’t want to see a plan that simply converted "bad debt into bad equity."

China Citic Bank Corp.’s Vice President Sun Deshun said at a press conference last week that any compulsory conversion of debt into equity would have to be capped. And Bank of China Ltd. Chairman Tian Guoli said in Boao that it’s "hard to evaluate" how effective debt-equity swaps will be, as so much has changed in China since the tool was used to bail out the banking system during a previous crisis in the late 1990s.

The bad debt firms are the better choice:

One big difference with the previous bailouts of 1999 and 2004 is the fact that many of the banks, SOEs and the asset-management companies have since sold their shares, in many cases to international investors, and now have to take shareholder interests into account, says Guangfa’s Mu.

...While banks are hesitant, China Huarong Asset Management Co., one of the four bad-loan managers that took part in the 1999 bailout and swaps, is actively pitching for a role in any new round of debt-equity conversion. The government should provide 1 trillion yuan to 3 trillion yuan of funding support, with banks, SOEs and asset managers sharing the risks, Lai Xiaomin, chairman of Huarong, said in a proposal to the top legislature earlier this month.

Trust Disaster Unfolding In Sichuan

Large potential trust defaults looming in the next year have grabbed the headlines, but these defaults may pose no systematic risk, even if they eventually end up on a bank's balance sheet. The greater risk may lie with the credit guarantee firms that have backed trust and bank loans in many areas. Consider the situation unfolding in Sichuan, where a credit guarantee firm is at the heart of multiple trust products that consist of loans to small and medium enterprises (SMEs). These loans were marketed as 80% prime and 20% subprime, but in one trust 80% of the loans are in default. In this situation, instead of one big borrower going bust and putting a trust in default, there are hundreds of firms involved across multiple trusts. Dozens of lawsuits are underway from the one trust that matured in August 2013; potentially hundreds loom if ensuing trusts fail at the same rate. These court cases will chill business activity and since many loans are in the same geographic area, the potential for systematic risk in local economy is higher, even though the trust amounts are much smaller and the individual loan amounts yet smaller still.

China Fortune International Trust and Jingu International Trust have made many trust loans cooperating with the Hopeto Credit & Guarantee Co (Huitong), a firm which is now in the process of being rescued by the government. Dozens of loans from a single trust, Sunflower SME Loans No.3 issued by Jingu, have gone bad and Jingu has sued dozens of borrowers in addition to credit guarantee firms that guaranteed the loans (see prior posts for background). That trust came due in August 2013, long before Huitong went bust. With the credit guarantee firm now in trouble, the problem could grow exponentially. The executives of Huitong are missing since July 6. The company (with help from the government) is working to gain the support of banks and creditors, discover the extent of the problem, and to gradually reduce risk.

One trust in question is Fortune's Xinhui SME Loan No.2, issued in February 2014, with ￥57 million in SME loans and a yield of 9% to 9.6%. The loans were secured by Huitong and Huitong guarantees investors' money should the loans go bad.

A manager of a credit guarantee firm explains that the trust companies became vehicles for excessive risk taking and leveraging. Credit guarantee firms became the lead actors: they issued the loans to the small borrowers who should not have had access to credit obtain trust loans, while the trust company handled fund raising. He also said that this is seldom seen with government credit guarantee firms, but often seen with private firms. The loans have costs of 16-18% (interest plus fees), with 12% going to the trust company and about 4% to the credit guarantee firm.

There are other trusts at risk. Fortune also issued Xinhui SME Loan No.1, No.3 and No.4. Except for No. 3 issued at the end of 2013, the others were issued in the first half of 2014. The last, No.4, was established on June 13 with ￥178 million in assets. As for No. 1 and No. 4, they are 80% prime loans and 20% subprime, with Sichuan Jingda Hengying Investment Management guaranteeing the subprime portion. Huitong is guaranteeing the rest. The 80/20 split is no consolation for investors. Only 20% of the loans in the Sunflower SME Loans No. 3 have been repaid and that trust launched in 2012 with the same 80/20 split. If the characteristics of the credit bubble in the U.S. has any similarities, the failure rate of more recent trusts is likely to be even higher. Along those lines, Sichuan Jingda Hengying itself was recently established in September 2013 with ￥50 million in capital.

Another trust in question: Sunflower SME Loans No.9, a 12-month trust that loaned ￥102 million to 13 SMEs in Chengdu, comes due on August 2. Another: Sunflower No.15 which came due in June and like Sunflower No.3, made loans to firms in Zhejiang, epicenter for the current real estate slowdown and an area experiencing an economic slowdown. Many firms there face tight credit conditions and business difficulties; there's no news on the repayment of those loans.

Yet another: Sunflower No.1 which made ￥250 million in loans to companies in Foshan, Guangdong province. Supposedly the split there was 90% prime/ 10% subprime. The adviser on those loans is Cinda (1359.HK).

Cinda owns 92.29% of Jingu Trust.

Source: 中小企业信托风险信号：华鑫、金谷信托接连卷入担保危局

Prior coverage: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust
Credit Slows With Private Credit Guarantee Firms Under Pressure in Sichuan
Guarantee Companies Behind Sunflower 3 Trust Bad Debts

Who Will Buy Bank of China's Toxic Assets? Bank of China

Update: I missed this WSJ article last month. The main point is the same, but the WSJ goes into more detail, and its not Google Translated from Chinese.

Bank of China Is Selling Bad Loans to Investment-Bank Unit

Bank of China Ltd., one of the country's big four state-owned banks, has started a new strategy of unloading soured loans to its investment-banking unit, which then would try to restructure the debt with the hope of recovering more than it paid for the loans, according to bank officials.

With the investment-banking unit expected to pay more than an outside investor, the bank would be able to record lower loan losses. Meanwhile, the problem loan would no longer stay on the bank's balance sheet after the sale under Chinese accounting rules. By comparison, such intracompany transactions usually aren't treated as sales under Western accounting standards.

Originally Posted April 2: Just a snip out of this article. Banks in China often sold non-performing loans to Cinda Asset Management (1359.HK), private equity and other players in the bad debt space. Bank of China thinks it can earn more money by restructuring the debts themselves in their investment banking division, rather than selling them off. The chief benefit though, may be that the subsidiary pays a higher price for the debt, reducing the reported loan losses.

谁在收购中国银行业“有毒资产”？

Chinese banks dispose of such "toxic assets" which are usually sold to outside investors in the past, these outside investors is China's large state-owned major asset management companies. In recent years, including China Cinda Asset Management Corporation, including asset management company to achieve such a huge profit.

The company's basic operations logic is to acquire a large discount from the bank in the hands of non-performing loans, and to recover more than the cost of acquisition funds. This business model by many people optimistic, with the increase in lending banks, asset management companies in the business of disposing of bad loans will increase, as the letter of the future profitability of these companies is very high.

But a growing number of subjects involved in this business started since last year, Zhejiang, Jiangsu provincial asset management companies have been established, mainly because the local banking sector non-performing loans increased rapidly in recent years, while taking into account the provincial asset management integration have the advantage of local resources and other areas, may be able to improve the efficiency of the stock of non-performing loans disposal.

In addition, local property trading platform, PE, trust companies and other organizations have been involved in this field with the past, the transfer of assets to the bad bank will be several large state-owned asset management company, to as low as 1-2 fold compared to the cheap sale, increased and diversified body of market competition will increase the sale price of non-performing assets.

In addition, even subsidiaries of commercial banks are involved in this industry.

Bank of China began to sell its investment banking subsidiary of non-performing loans, after this subsidiary will restructure these loans, with a view to recovering the loan is higher than its acquisition price of capital. Since the purchase price under the investment bank subsidiary of the non-performing loans is expected to be higher than outside investors, the Bank of China can be included relatively few loan losses.