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China sells first pools of NPLs

(FT.com)
Updated: 2006-11-24 10:39

China Cinda Asset Management plans to securitise 4.75 billion yuan (US$604 million) in bad loans acquired from Bank of China, creating the first debt instruments formed from the country's mountain of non-performing bank assets.

The move by Cinda, one of four state-owned firms created to take on bad debt from the country's biggest banks, represents an attempt to accelerate disposal of loans taken on over the past seven years.

Cinda's securities will be backed by about Rmb21bn of non-performing loans made in prosperous Guangdong province.

The securities will be made available through an intermediary trust vehicle and have a maturity of five years. Of the 4.75 billion yuan total, Cinda itself plans to buy back about 1 billion yuan.

A Cinda official said that as long as this initial sale proceeded smoothly, they would look to issue similar securities products in future.

Orient Asset Management, one of Cinda's peers, is expected to issue NPL-backed securities in the weeks ahead.

The four asset management companies handling bad debt have in the past two years voiced a desire to become more commercially driven. Securitisation could be a way for AMCs and domestic banks to adopt global practices and spread risk.

Since late 2005, China's bank regulators have allowed some leading financial institutions to experiment with securitisation.

China Construction Bank issued more than 3 billion yuan in mortgage-backed securities under a pilot project at the end of last year. In a second pending trial, Agricultural Bank of China is to follow in its footsteps.

Also in a first trial, China Development Bank issued asset-backed securities - supported by tranches of corporate loans - and followed with a similar transaction this year. Those issues totalled 9.9 billion yuan.

Securitisation of assets, good and bad, is very new to China. Experts and officials have said the regulatory and tax environment has yet to be fully clarified.

One Hong Kong banker said many foreigners were interested in buying Chinese asset-backed securities but were often confused about the procedures. China's market for fixed income products is expected to grow quickly in coming months.

"If 2007 proceeds as expected, China could see up to 10 securitisation deals with a volume of between 50 billion and 100 billion yuan," said Kevin Stephenson, managing director and head of structured finance in Asia at Fitch Ratings.