The Chinese word for crisis, weiji, means danger and opportunity. This reflects the China strategy of ADM Capital, which is opportunistic in manoeuvering nimbly across the wreckage of defaulted or distressed companies as it hunts for good investments.
“ADM Capital invests opportunistically. Many clients approach ADM Capital because they require financing to complete a project or to opportunistically pursue growth strategies,” said Celia Yan, the head of greater China investments at ADM.
ADM, which stands for Asia Debt Management, mostly provides debt financing for companies which are unable to obtain financing via traditional channels. Generally, loans range from $20 million to $50 million.
While ADM’s debt investments can be short or medium term, the average holding period of ADM’s loans is approximately two years, shorter than most private equity investments.
“We therefore have the flexibility to adjust our investment strategy based on the investment environment,” Yan said.
At the moment, ADM sees potential in China’s troubled corporate sector. China’s economy endured a perfect storm in the second half of last year with the credit crunch, the Sino-US trade war and the crackdown on shadow banking. All of these combined to create a liquidity crunch for Chinese companies.
“This created opportunities for ADM Capital to sponsor private equity or strategic acquisitions at more reasonable valuation levels,” said the Hong Kong-based executive.
Up to March 25 this year, 33 corporate bonds totalling Rmb22.68 billion ($3.4 billion) have defaulted in China, according to Chinese financial data provider Wind. Last year saw a record level of corporate bond defaults in China with 124 bonds totalling Rmb120.56 billion, a big jump from the 35 corporate bond defaults in 2017 totalling Rmb33.75 billion.
As a result, some companies were forced to sell assets to repay debt. In many cases, equity partners injected equity investment while ADM provided debt financing or bought and restructured the portfolio company’s debt.
ADM likes to focus on sectors that have strong growth and are aligned with government policy, such as consumer, healthcare and technology. “We are sector agnostic,” Yan explained.
The company targets returns in the mid to high teens. “When entering investments, we ensure that we have multiple exit options, which might include repayment from operating cash flow, refinancing or strategic sales,” she added.
Foreign investors became more active in China’s nonperforming loan (NPL) market especially in the second half of 2018. The catalyst for increased foreign involvement was stricter shadow banking regulations, which created liquidity issues for local non-bank lenders. Since the second half of last year, NPL pricing has tended to be more reasonable because of the ensuing reduced competition from local players, Yan said.
As a medium-sized player, ADM leaves the distressed debt portfolios to the large foreign investors which can deploy hundreds of millions of dollars per deal in China.
The company's strength is in single credit and single asset situations, where it can manage and structure the terms of the deal. “We like to be in the lead lender, and often the sole lender, in our transactions. In these situations, we are able to limit downside risk with strong governance and controls,” Yan said.
OTHER BUSINESSES
Another business that the company has focused on is Chinese outbound acquisitions - particularly in Canada and the US - where ADM has exposure. “I see a significant slowdown in Chinese companies doing outbound investments, especially in the US, due to the Sino-US trade war and the liquidity tightening in China,” said Yan.
“Outbound-related financings have been an important strategy for our China business in recent years, however, we see this shrinking in the next one to two years,” she added.
ADM was founded in 1998 during the Asian crisis to invest in Asian bad debt. Over the following decade, ADM diversified to traditional industries such as real estate, energy and manufacturing in China, thanks to strong growth and favourable macroeconomic conditions. In the last five years, as China’s economy has become more service-oriented, ADM's lending has shifted to “New Economy” sectors such as technology, education and healthcare.
The Chinese government began to encourage foreign players to invest in NPLs during the early 2000s. “As a distressed debt manager, we naturally got involved in Chinese NPLs during this period,” Yan recalled.
Following the global financial crisis in 2008, ADM’s strategy evolved from NPLs to focus on direct lending, predominantly financing expansion in China and the broader Asia region. It has investments across the Asia Pacific region, including Southeast Asian emerging markets and the developed economies of Australia, New Zealand, Singapore and South Korea. Since 2004, ADM Capital has deployed $2.96 billion in 122 private credit transactions across 16 countries with 104 exits.
In 2017, ADM Capital launched the Cibus Fund, a private equity vehicle which invests in food chain companies in OECD markets. In January last year, for example, Cibus acquired a 99% stake in Spanish olive oil producer Olivos Naturales.
True to its opportunistic nature, ADM said, “The Cibus strategy will invest opportunistically in food companies whose operating model, proprietary technologies or access to natural resource inputs provide a competitive advantage.”
This story was corrected to show that ADM Capital was not founded to work on Chinese distressed debt specifically. It was established to invest in distressed Asian companies.
