Non Performing Loan Transactions and Land Use Rights in China

1. Non Performing Loan Transactions and Land Use Rights in China Presented by: Robert J. Allan USA China Law Group US-China Business Law Conference at UCLA Los Angeles, Ca - October 24, 2008

2. Current Economic and Legal Climate for Investments in China

3. Foreign Investment in China Overview Top destination for foreign direct investment (“FDI”) for sixteen years * US $52.39 B in FDIto China in the first half of 2008 – a 45.6% increase over the same period in 2007 ** Foreign invested enterprises (“FIEs”) play a major role in China’s economy – 58% of imports and exports * Top foreign investors: HK first; US sixth * Top FDI destination: eastern region – 81.9% * Hot sectors: manufacturing (57.7%) and real estate (11.9%) * Sources: * The US- China Business Council ** Asia Monitor, September 2008

4. Issues to Watch Economic protectionism Push for “indigenous innovation” New rules on foreign investment Enterprise Income Tax Law Labor Contract Law Antimonopoly Law Catalogue Guiding Foreign Investment in Industry Revised regulations on the management of foreign exchange

5. What Chinese Government Wants Encouraged Sectors: Non-performing Loans Services Emerging and high-technology Energy and the environment Healthcare

6. What Chinese Government Doesn’t Want Restricted or Banned Sectors: Real estate Media and publishing Manufacturing solely for export Manufacturing requiring a high usage of resources or energy

7. An Overview of Non Performing Loans in China

8. Background of China’s Non Performing Loan (“NPL”) Market • High ratio of NPLs • Source of NPLs – Politically based lending practices of State Owned Enterprises (“SOE”) • Disposition of NPLs remains a top priority of the PRC • Reform of the banking system • WTO accession • Privatization of SOEs • New banking policies to address the economy’s growth • Creation of the Asset Management Corporation (“AMC”) • Facilitate acquisition of NPLs from State Owned Banks • Facilitate acquisition of NPLs from commercial banks

9. Opportunities and Emerging Trends • Big Market • Current transactions in the market • Upcoming transactions • Big Players • Big Deals • Reasons sales will increase in 2008-2009 • Impact of global recession-depression

10. Why NPL in China? • Easiest and most effective way to acquire interests in land use rights and businesses in China • Significant discounts • High intrinsic values • Simplified acquisition and approval processes • Foreign exchange benefits • RMB undervalued by 30-40% * Source: * Asia Monitor, September 2008

11. Challenges Facing Foreign NPL Investors in China • Local knowledge essential to successful transactions • Motivation and political agenda of the sellers • Limited time span to undertake due diligence • Numerous political and regulatory hurdles • Complicated governmental approval processes • Limited exit strategies • No leverage

12. Investment Strategy and Process

13. Key Investment Criteria • Well developed primary cities • Significant unambiguous collateral and assets • Clear understanding of investment target • Ability to resolve critical issues: -Legal -Regulatory -Financial -Operational • Comfortable buffer on pricing and vigorous risk management mechanisms

14. Key Investment Criteria • Extensive and comprehensive pre-tender due diligence • Realization or enhancement of the intrinsic values of the assets • Target annual IRR of 25% • Liquidity within 2 years

15. Investment StrategyPrioritization of NPL Portfolio Assets Collection Medium Assetranking Asset categorization Difficulty assessment • Analysis • Litigious or non-litigious • Assignment of staffing for collection • Rank debt accounts for collection • Collection on high value accounts • Assignment of staffing for collection • Categorize accounts • Assign specialist according to the categorization • Assessment • Allocation of specialist Selection of most efficient collection medium Prompt action on high value accounts Specialization to ensure collection Ensure collection even adverse cases

16. Investment Process Deal sourcing and screening Due diligence Analysis Pricing and deal structure Recovery process Post-acquisition value creation

17. Recovery Process Recovery Projection Feasibility Analysis Examination of Creditor’s Right Recovery Analysis Cost Estimation Asset Investigation Legal Opinion Independent Agents’ Opinions Solution Implementation Creating Preliminary Recovery Solutions

18. Exit Strategy

19. NPL Investment and Acquisition of Land Use Rights

20. Factors Affecting Direct Investment in Chinese Real Property Market • Chinese concept of “land ownership” • Land use rights • New restrictions concerning foreign investment in real estate market • New Property Law • Opinions Concerning Regulating the Access to and Administration of Foreign Investment in Real Estate Markets • Notice Concerning Regulating the Purchase of Residential Property by Foreign Institutions and Foreign Individuals • Circular 30 – Circular of General Affairs Department of SAFE on the Distribution of the List of the First Group of Foreign Invested Real Estate Projects which has Filed with the Ministry of Commerce

21. Acquiring Land Use Rights Through NPLs • Collateral for loans primarily consist of land use rights • These creditors rights can be sold to the ultimate end user • Most efficient and effective approach to pair ultimate end user with local developer

22. Case Study

23. Case Study • Introduction • Sold by AMC, originally acquired from Chinese commercial bank in 2007 through a public sealed bid offering • 33 borrowers a majority of which are located in Beijing • OPB RMB 1,098 million; total legal claim RMB 1,410 million as of 30 September 2007

24. Case Study • Due Diligence – February 2008 • A desktop financial and legal review of 25 borrowers • represents 76% of the total accounts in number • represents 97% of the total OPB • Done by big four accounting firm and Alpha & Leader Law Firm • Scope of due diligence • Loan information and current status of borrower • Current status of collateral • Litigation & legal flaws • Risk & risk management • Recovery strategy and implementation • Recovery ability analysis • Valuation methods • Estimated recovery amount • Estimated recovery time -Possible disposal methods -Recovery resources

25. Case Study • Post-acquisition Value Creation • Examination of creditors rights and asset investigation • Recovery projection, recovery analysis, cost estimation, independent agent’s opinions • Creating preliminary recovery solutions • Feasibility analyses and legal opinions • Solution implementation Estimated total recovery amount: -RMB 633,536,244.13

26. Case Study Acquisition Time Line Time Line Procedure Dec. 2007 COAMC purchased the portfolio from Bank COAMC issued the transaction timetable Late Dec. 2007 Approach major foreign investors Early Jan. 2008 Reach initial MOU among co-investors Mid. Jan. 2008 Mid. Jan. 2008- Late Jan. 2008 Portfolio DD Feb. 2008 Roll-up Late Feb. 2008 Investors going through internal approval process 3rd Mar. 2008 Go through tender process Apr. 2008 Obtain approvals from National Development and Reform Commission May 2008 Obtain approvals from State Administration of Foreign Exchange Transaction Closed

27. Case Study

28. Thank You!