Growing pains

Private debt lenders with Chinese restructuring expertise are set to reap the benefits from the stock market crash, but the wider opportunity isn’t necessarily the obvious one.

As China reels from its worst stock market crash since the global financial crisis local shadow banks are being blamed for fuelling the equity bubble with margin loans, an accusation that does little for the reputation of private lenders generally.

But the situation still throws up private lending opportunities, both for reputation and business. S&P predicts global demand for corporate debt will total $57 trillion from 2015 through to 2019 and, at 40 percent, China will represent the lion’s share.

However, the ratings agency also warned this week that the nature of that debt, opaque and rising, could destabilise markets.

Fortunately, there are signs that the margin lending binge by Chinese private lenders is slowing.

Margin finance backing investments via the Shenzhen and Shanghai stock markets has almost halved from a height of RMB2,260 billion ($364 billion; €334.6 billion) in June, to RMB1,438 billion, as of 14 July, according to Barry Lau of Adamas Asset Management.  “It reduced by close to $10 billion per day in July,” Lau adds.

Public equity markets have been frozen since Chinese authorities intervened and Bloomberg reported today that the government has made 2.5 billion to 3 billion yuan available to prevent future price drops. But private lenders must be nursing mark-to-market losses.

The emerging opportunity may not be the obvious distressed play, however. Chinese non-performing loan manager Shoreline Capital, which surpassed its target for its third distressed fund raising $615 million and upping its overall target to $700 million, said it has seen a wave of non-performing loans. However, exploitable distressed opportunities are likely to be limited to just a few established players.

For private lenders, the opportunity in China remains within the private small- to medium-sized enterprises that are growing but can’t get finance from their banks. And stepping into this arena to finance the real economy can only boost the reputation of the best and most responsible alternative lenders.

The equity market is evaporating so the number of corporates seeking finance on the offshore Hong Kong public markets is likely to increase. In order to facilitate this, however, companies may first need to undergo some form of debt restructuring or risk-profiling.

The problem for offshore creditors is structural subordination. Chinese real estate developer Kaisa, which has defaulted on an estimated $10 billion in debt, is a case in point. “Its onshore lenders almost came through unaffected, its offshore lenders are wiped out,” a source says.

Credit providers must remember that having full proof rights to collateral is more important than ever.

A storm maybe raging in China, but some private debt lenders are still making positive noises about developments in a country moving towards a more market-based economy. In the meantime, it’s a case of batten down the hatches and be prepared to anchor yourself to a more complex situation when brighter days reappear.

 

Private debt in China and the wider Asia-Pacific region will be discussed in detail at the PDI Asia Forum 2015 on 12 November.