1 / 17

AMCs and NPL activity in China

AMCs and NPL activity in China. The Second Forum for Asian Insolvency Reform (FAIR) Bangkok, Thailand 16-17 December 2002. Michael Harris. Restructuring the Chinese banks: NPLs and AMCs. D. Background. Big four commercial banks Bank of China Agricultural Bank of China

gerry
Download Presentation

AMCs and NPL activity in China

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. AMCs and NPL activity in China The Second Forum for Asian Insolvency Reform (FAIR) Bangkok, Thailand 16-17 December 2002 Michael Harris

  2. Restructuring the Chinese banks: NPLs and AMCs D

  3. Background • Big four commercial banks • Bank of China • Agricultural Bank of China • Industrial and Commercial Bank of China • China Construction Bank • Spun-off from PBOC in 1980s • Owned by Ministry Of Finance • Policy Banks • E.g., China Development Bank • Others • Second Tier Institutions; Rural Cooperatives D

  4. Background (cont’d) • Problems faced by “Big 4” Commercial Banks • Overstaffed • Undercapitalised • Historically, no competition to drive best practices • Lending at direction of state based on political/social considerations • “Success” measured, in part, by loan volumes

  5. Estimated NPLs in China Chinese government US$218bn US$680bn Standard and Poor’s ??? Real number

  6. The restructuring Ministry of Finance PBOC • Big 4 get PBOC backed notes for NPLs at face • PBOC funds AMCs in return for AMC debt • AMCs to work-out the NPLs • PBOC bears the haircut • AMCs pay cash for NPLs at face $ “IOU” $ Big 4 AMCs NPLs at face $ NPLs An intra-State money-go-round

  7. The AMCs NPLs US$bn Source bank AMC Bank of China China Orient 32.8 ICBC Huarong 50.1 China Construction Cinda 45.9 Agricultural Bank Great Wall 42.6 Loans categorised broadly by industry type 171.4

  8. Functions of AMCs • Preserve assets, reduce losses • Debt/Equity Swaps • Sale of Collateral • Consultancy • Portfolio Sales • Investment Banking

  9. Barriers to recoveries • Estimates of overall recoveries vary • Consensus is less than 20% of face • Barriers to recovery include • Inherent weaknesses in the loan portfolio, in part due to: • Age of loans transferred to AMCs • Mandated by Government • Inadequate legal framework • E.g., Bankruptcy Law provisions • Resistance to reform • Debtor expectations • Local politics • Foreign investor publicity M

  10. AMC reported recoveries • Ministry of Finance target of 30% cash recovery rate • Cumulative reported cash recovery rate is 21.6% • Small proportion of loans “dealt with” • Early recoveries relatively high – “low hanging fruit?” • Situation unlikely to improve over time 2Loans dealt with in 2001 US$9.4bn, of which US$3.2bn realized in cash 1.6% cash recovery to date Total NPLs US$171.4bn M/T

  11. Foreign investment solutions • Changes to laws to allow foreign investment • Considerable interest, but treading carefully • Recoveries expected to be low, therefore investment prices are lower • Common structural aspects • Ownership • Control • Servicing • Upside

  12. Issues for foreign investor participation • Remittance • Information • Expectation gap • Pricing • Language • Everything is in Chinese ! T

  13. Foreign investor deals “completed” so far • Huarong AMC • Foreign investor roadshow – July, 2001 • Deal announced – November, 2001 • Final approvals received – December, 2002 • China Orient • US$217m portfolio • All approvals in place • Cash changed hands • Recoveries now being remitted overseas

  14. Foreign investor deals “completed” so far • Cinda AMC • Cash changed hands • Small portfolio • Still waiting on certain approvals • Great Wall AMC • Winning Bidder chosen • Documentation ongoing • Final approvals being pursued

  15. Issues Impacting Portfolio & NPL Pricing & Resolution • Historical Collection Rate • (BIS Position Paper) • Approval Process • “Headline Targets”& Minimum Reserve • Valuation guidelines & procedures • Valuation of borrowing entity v. • Valuation of NPL • Hidden Costs • Land Use Rights • Registration Fees • Social Welfare costs • Construction completion costs

  16. Issues Impacting Portfolio & NPL Pricing & Resolution • Marketability of Debt/Equity Swap Positions • Board Representation • Accountability • Dividend reliance • Discounted Pay-off (DPO) application • & liquidity considerations • Competition from other sources • Domestic (e.g., China Construction Bank / • Morgan Stanley discussions; ICBC auction of • Selected “Settled Assets” • External • e.g., Taiwan

  17. Possible Future Considerations • Re-assessment of bond obligations & impact • To capital structure • Continued adoption of Int’l guidelines • For Loan Loss Reserve Analysis • Limited capital chasing deals • Other approaches • E.g., Securitisations • Clearer picture – post Party and Peoples • Congresses

More Related