Oaktree Capital Group has struck a joint venture with China Cinda Asset Management, marking a significant overseas entry into the mainland’s non-performing loan (NPL) market, which foreign firms have been keen to access.
US-based Oaktree, one of the world’s largest distressed investors with $79.8 billion in AUM, says it will jointly invest in mainland distressed assets with Cinda, one of four state-owned banks set up to acquire Chinese NPLs.
Under a memorandum of understanding, Oaktree and Cinda will take equal ownership in the JV, which could reportedly invest as much as $1 billion.
The partnership will also extend to distressed investments outside China. No financial details of the MoU were released, with an Oaktree spokesperson declining to provide further information.
Oaktree is one of 10 cornerstone investors in Cinda’s upcoming initial public offering in Hong Kong, in which the US firm will invest $53 million. The IPO, slated for next month, is expected to raise up to $2.45 billion.
Cinda’s other cornerstone investors include fellow US distressed specialists Farallon and Och-Ziff.
Oaktree's co-investment partnership is notable because “the China NPL market in which Cinda specialises in is closed to foreign investors”, says one industry executive.
“We have known a number of foreign players who really wanted to get into the China NPL market, but faced a lot of difficulty in getting the good deals. Most of those went to the four alternative asset management companies, of which Cinda is the biggest,” the executive tells AsianInvestor.
Cinda had Rmb284 billion ($46 billion) in assets as of the end the first half of 2013 and is one of four ‘bad banks’ set up by China in 1999 to mop up non-performing bank loans at below face value.
The NPLs are the by-product of a mainland stimulus policy launched in 1998 amid the Asian financial crisis. Aimed at recapitalising the domestic banking sector, it had an unintended side-effect of creating bubbles in certain sectors, such as property.
Cinda has scope to further expand its asset pool – which includes real assets such as property that banks will no longer finance – as the full extent of China’s NPL market comes to light.
“It is widely expected that there may be a lot of hidden NPLs on the big state-owned banks’ balance sheets,” says the industry executive.
In the past five years, Chinese banks have added assets that surpass the total banking system in the US, says Stephen Cannon, head of China at boutique investment bank Redbridge Group. “I doubt those are all good loans.”
Speaking at the Latham and Watkins Asia Restructurings Summit this month, Cannon predicted: “When the credit cycle turns in China, it’s going to be the mother of all restructuring and distressed opportunities.”