Deal Flow Expected to Increase for Distressed Debt Investors in China


China’s highly fragmented struggling debt market has benefited from a steady flow of transactions in recent years, and prices are expected to improve for debt buyers due to the impact of the coronavirus crisis, according to the one of the few foreign operators working successfully in this field. space out.

According to Benjamin Fanger, managing partner and founder of ShoreVest Partners, a private investment firm specializing in distressed Chinese debt and special situations such as bridging debt, estimates of China’s legacy non-performing loans range from $ 1.5 trillion. from dollars to over $ 3 trillion.

Before COVID-19, there was already a significant flow of non-performing loans (NPLs) due to the government’s focus on cleaning up the banking system by recognizing and selling NPLs, Fanger told the Investment magazine Trust Investor Symposium.

Speaking with Alex Proimos, Investment magazine responsible for institutional content, Fanger said that China’s experience with Covid-19 has yet to cause an increase in the availability of non-performing loans, as the Chinese government has asked banks to implement a forbearance of defaults like many other countries in the world. But the prices for investors are improving.

” A difference [since the onset of COVID-19] do you have a lot less potential buyers in china with cash to buy these nonperforming loans, which is likely to put downward pressure on the prices that sellers can get for the loans than you do? they are trying to sell.

After forbearance, more loans will be recognized and prepared for sale, and sent to the big four asset management companies (AMCs) – known colloquially as “bad banks” – which are essentially clearing houses where they’re brought to market, Fanger said.

These likely won’t start arriving until the end of this year or even later, but when they do, prices and transaction flow for debt buyers will likely improve, Fanger said.

The Fanger team has been operating in China for over 15 years, investing in over 15,000 Chinese NPLs. ShoreVest adopts a strategy of purchasing asset-backed debt, typically senior secured loans backed by buildings.

While real estate sales volumes have fallen this year, prices have yet to do so, Fanger said, and even if they do, they would need to drop significantly to impact ShoreVest’s investments.

“Fortunately for investors like us, we don’t price close to the value of the underlying collateral, so we buy NPLs at around one-third of the value of the underlying collateral and even the special situations we are generally less than 50%. ready to value. “

The Chinese legal system has improved dramatically over the 15-plus years of ShoreVest activity, taking one or two years for an “ordinary case” of credit execution, compared to four or five years when ShoreVest started for the first time. first time, Fanger said.

But one area where foreign investors run into problems is situations that can cause social unrest, and these should be spotted and avoided as part of due diligence.

“If the building that we want to auction employs thousands of people and there is no potential buyer who can continue to employ those people, then you basically have to lay off hundreds or thousands of people, the government, especially local government, is going to be very concerned about the protests, ”Fanger said.

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Carol M. Barragan

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