Pension funds offer leverage for NPL acquisitions in China

Risk taking is a way to get higher returns although advisors encourage investors to examine the risks thoroughly.

Distressed debt and special situations managers in China are seeing positive investor sentiment for non-performing loan strategies as LPs look for portfolio diversification and better returns from a relative value perspective.

As PDI reported, commercial banks and asset management companies are now allowed to engage in private sales of NPLs in China, which can boost overall transaction volumes.

However, in addition to perfecting legal documentation, investors should examine risks associated with underlying collateral location and creditors’ right in specific jurisdictions, two investment advisors pointed out.

Manjot Rana, a Hong Kong-based senior principal in CPPIB’s Asia-Pacific credit team, one of the six investment groups under CPPIB’s Credit Investments umbrella, told PDI that CPPIB provided a debt facility to a global alternative investment manager, which was looking to lever up an acquisition of a bank’s non-performing loan portfolio in China.

He added that the loan portfolio was mostly backed by hard assets primarily in tier 1 cities. The typical leverage level for such a portfolio acquisition can be “up to 65 percent, based on transaction value”.

Fiona Cumming, a Hong Kong-based partner at Allen & Overy, a London-headquartered law firm, said these non-performing loan portfolios are typically real estate-backed and located in provinces close to Hong Kong, such as Guangzhou, or near top-tier cities, including Shanghai and Beijing.

Where these portfolios had taken on leverage, the debt had been provided to the international private equity houses both before the acquisition and after to refinance the equity, she said.

Helen Wong, founder and chief executive of Lapis Global, a Hong Kong-based investment management and advisory firm, added that when lending against properties in the second- and third-tier cities of China, the district major can shut down the legal system.

“If you are not in Beijing or Shanghai,…, you are out of luck,” she told delegates at the PERE Debt Forum 2019 in Hong Kong, adding that, “it is a whole different game if you want to control [collateralised property]”.

Additionally, there are investor concerns based on their positioning between the equity and the debt. “Credit investors are concerned about how to proceed with the enforcement procedures out of China, whereas the NPL equity investor worries about its resolution strategy or how to monetise the secured assets,” she said.

Another concern is the regulatory regime can change rapidly and without warning, especially with respect to cross-border currency controls, according to Cumming.