Along with “a few” global and Asian credit funds in the space, Shoreline is one of a few institutionally-backed private equity firms that buys distressed debt in China, according to its founder Brian Fanger. “The banking system has made a lot of loans that have gone into default. Because of regulations, banks are encouraged to sell off their bad debt.”
From 2009 to 2011, the Chinese market was flooded with credit leant to corporations, which has continued to grow, Fanger said. “So now you have this massive credit bubble.”
Over the past 12 years, the firm has invested around $700 million of distressed debt in China. Fanger added that the total amount of non-performing loans beneath the surface in China is generally estimated to be in the trillions of dollars. Shoreline has purchased debt on companies in different industries ranging from hotels, textile manufacturers, steel manufacturers to power plants, he said.
At the other end of the spectrum, Shoreline also provides bridge lending to performing companies that are not able to get a bank loan. In addition, the firm provides credit restructuring for distressed companies.
“What we do includes a range of things, all the way from buying a pool of a thousand non-performing loans, to direct secured financing to a company that can't get a bank loan. So it's all illiquid credit,” Fanger said.
Shoreline typically exits through auctioning assets, negotiating with the guarantor or borrower, or selling to an investor who has an interest in the collateral, which can sometimes be a smaller distressed shop, or local investor in China, or through a debt-equity swap.
“Today there is a really robust alternative asset management industry in China, ranging from venture to other forms of private equity. But in my opinion, especially starting in 2015, distressed debt is the most exciting right now,” Fanger said.
Shoreline Capital has offices in Beijing, Guangzhou and California. The firm's investors include endowments, foundations, pension funds, insurance companies, sovereign wealth funds from around the world. In addition to Fanger, who speaks fluent Mandarin, the firm has about 50 Chinese employees.