China’s NPL market not feeling the distress

Although billion dollar-plus NPL deals may be fairly common in Europe, China’s market offers fewer big ticket opportunities for international investors.

Despite a glut of non-performing loans in the country, international investment houses have not been able to replicate in China the multi-billion dollar deals that the market has seen in Europe.

China’s reported NPL numbers are staggering. The China Banking Regulatory Commission reported $219 billion of commercial banking NPL stock at the start of the year. Yet, this excludes ‘special mention loans’ that are distressed positions in non-banking sectors such as asset management companies and Chinese corporates, bringing the total to above $700 billion, according to data from advisory firm PwC.

“With a lot of the smaller deals, the domestic guys are willing to transact with relatively light diligence and in some instances, looser underwriting standards.”

– James Dilley

For instance, in August, Blackstone acquired a portfolio of Chinese NPLs for $200 million from Huarong Asset Management, one of the big four asset management companies in China. That same month, the firm agreed to invest about €5 billion in a majority stake in the property portfolio – which includes €12 billion of non-performing loans – of Santander-owned Banco Popular.

One reason for the lack of mega-portfolio transactions in China stems from control the Chinese government wields on local banks and AMCs, which control the vast majority of NPL dealflow.

“The government has been pressuring the banks to clean up their books but at the same time trying to maintain stability, given the rollercoaster stock market and fluctuating bond market, so they are trying to resolve the NPL problem in the banking system gradually,” said Eddie Hui, managing partner at Hong Kong-based alternatives investment firm PAG, which has closed a couple of NPL deals in China in recent years. “They are not in a big rush. The pressure is constant but it is not enormous.”

Also keeping the pressure off Chinese banks and AMCs is the highly competitive pool of domestic investors, which means sellers are not willing to drop pricing to sell in bulk.

“With a lot of the smaller deals, the domestic guys are willing to transact with relatively light diligence and in some instances, looser underwriting standards,” said James Dilley, associate director of the Portfolio Advisory Group at PwC in Hong Kong.

Moreover, the market is still too immature for mega-portfolio sales, according to one US-based investment house that has completed China NPL deals. The manager said that similar to Europe five years ago, international investors are well aware there is an opportunity, but question if it is yet scalable.

Hui said PAG is conducting due diligence frequently and the market shows constant dealflow, with portfolios of $100 million to $200 million coming to market regularly. But given the lack of pressure from Beijing and an aggressive domestic market, mega-portfolios are not expected to start appearing anytime soon.