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Distressed Market: Cinda Tries a New Trail on Bad Debt Trek

One of China’s major distressed asset managers, Cinda, appears to be ready for reform. But questions – and bad debt – linger.

The news came late, but at least it came. Ministry of Finance sources recently told Caijing that Cinda Asset Management had been approved by the State Council for a pilot project aimed at reforming its business model.

It was a huge step for Cinda, which was founded in 1999 as a state-owned financial asset management company (AMC) for disposing of distressed assets on behalf of the government.

Now a decade old, Cinda plans to continue with its original mission. But the latest approval gives the firm a green light to draft a restructuring plan. Technical details would be reviewed by the State Council, China’s cabinet.

Meanwhile, authorities have started eyeing incentive policies aimed at encouraging Cinda’s evolution as a market-driven financial firm. One potential incentive would let Cinda acquire all debt-equity conversions from China’s three, other major AMCs.

Through another incentive move, it’s also likely that a new company will be created to dispose of about 200 billion yuan in NPLs on behalf of Cinda. And the possibility of inviting strategic investors to join the firm for share reform — and perhaps an IPO – has not been ruled out.

During an October 17 interview with the media including Caijing, China Construction Bank Chairman Guo Shuqing showed an interest in investing in Cinda.

“The hardest thing is evaluation,” Guo said. But on a positive note he added, “It will be a purely a business activity.”

Caijing learned that a final audit report and evaluation paper for the firm will be released around the end of the year which could give further impetus to a new direction for Cinda.

Back in 1999, the government created AMCs — including Cinda, Huarong, China Orient and Great Wall — and gave them 10 years to settle accounts on a combined 1.4 trillion yuan in non-performing assets that had been held by state-owned banks.

They initially obtained a combined 604 billion yuan from the central bank to help with refinancing bad assets, then issued 811 billion yuan in 10-year bonds at a rate of 2.25 percent to China Development Bank as well as four, state-owned banks – CCB, Industrial and Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China.

However, now 10 years later, plenty of work remains. The asset managers face tough decisions in dealing with a lingering mountain of bad loans.

State-owned banks that underwent share reform and restructuring in 2004 used AMCs to dispose of a second pile of bad assets totaling 942 billion yuan. Cinda received 405 billion yuan, Great Wall’s share was 263 billion yuan, Orient took over 250 billion yuan, and Huarong got the smallest chunk worth about 23 billion yuan.

Cinda turned out to be a better performer than the other state-owned asset managers for handling distressed assets. Nevertheless, the firm used almost all its earnings to pay interest on the 10-year bonds.

In September, 10-year bonds totaling 247 billion yuan that CCB issued to Cinda matured. But the bank announced a hold extension of another 10 years for the bonds, as requested by the Ministry of Finance, at a 2.25 percent annual interest rate while the ministry continued to help repay the principal and interest.

Cinda had sought to restructure for years. An obvious hurdle, however, was handling interest payments on bonds and refinancing bad debt assets acquired from state-owned banks. AMCs paid 31.5 billion yuan a year in interest on the bonds, leaving little to supplement their capital base.

Caijing has learned that the finance ministry may grant some preferential policies to Cinda. One would involve relevant debt-to-equity conversion assets from the other three AMCs, which would be allocated to Cinda. These would be comprised of NPLs from state banks and distressed assets from SOEs.

Cinda would have to employ capital market strategies to increase the value of these debt-to-equity assets. That would pave the way for Cinda’s emergence as a main platform for settling these types of assets.

Yet many issues are still unclear. At what price would Cinda acquire these debt-to-equity assets – at a price based on book value or market value? And how might the firm arrange personnel for working with SOEs on these assets? Unless the scheme is carefully thought out, Cinda could end up with no benefits.

Meanwhile, it’s unclear whether the other AMCs will survive separately or combine into a single entity. That decision could come from the State Council, which so far has not indicated any firm direction for transforming AMCs.

One plan being discussed by all parties is that quality assets may be injected into a new company, which in turn could seek to launch an IPO. The 200 billion yuan in non-performing assets would remain the parent, Cinda, while profits generated by the newly listed company could hopefully absorb Cinda’s financial burden gradually.

Meanwhile, AMCs have been busy obtaining a variety of licenses allowing them to offer financial services including securities, financial leasing and trusts. However, only a fraction of these businesses would be actual extensions of distressed asset settlements, the firms’ main business.
Ho Jianhang, vice president of Cinda, told Caijing that the firm “will be consistent with handling non-performing assets settlements and financial firm liquidations. This is Cinda’s core competitiveness.”

China’s non-performing asset market has long been embedded in institutional barriers. When they were established, AMCs were given multiple missions. But these multi-dimensional goals resulted in conflicts that put AMC operations in tough situations.

For example, the task of settling the bad debts of state-owned enterprises and non-performing assets held by state-owned banks is extremely difficult in the context of China’s lack of a social security system and legal shortcomings. AMCs trying to do their job can hardly follow market strategies, as they were told.

In April 2008, the Supreme People’s Court released a new regulation in the form of “conference notes” regarding the transfer of non-performing debt from financial institutions. SOEs and local governments were granted priority in acquiring these NPLs.

The court’s decision may lead to replacing AMCs with SOEs for settling distressed assets. And this means Cinda still faces immense uncertainty while striving for transformation into a market-driven asset manager.

Source: Caijing 06.11.2009 by Zhang  Yuzhe and intern reporter Jiang Zhinan contributed to this article

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