Oaktree Capital Group’s chairman Howard Marks said on Monday that its joint venture with China’s China Cinda Asset Management is on the hunt for large distressed debt situations at a time when bad loans at Chinese banks are rising.
It’s been almost one year since Cinda raised $2.46 billion in an initial public offering to become the country’s first distressed debt manager to float its shares.
Los Angeles-headquartered Oaktree pledged $53 million in cornerstone support and signed a memorandum of understanding with Cinda to seek out opportunities in the mainland’s distressed asset industry. A person familiar with the matter said that the joint venture partners planned to invest up to $1 billion.
“We’re gaining exposure to the Chinese distressed debt market and learning and growing as we had expected,” said Marks in a briefing with journalists in Hong Kong. “We would do it again.”
His comments come as stress rises in China’s property sector and bad loans accumulate at the country’s five biggest banks as the world’s second-largest economy slows.
Another source familiar with the matter said that the joint venture has not made any investments yet.
“We’re looking for large situations where we can make asset-based investment decisions. We believe we’ll find it,” said New York-based Marks.
“The China Cinda investment was an unusual one for us as it included an investment on which we hope to make money as well as a strategic aspect with an important player in China,” Marks said.
In addition to Oaktree, Och-Ziff, Norges Bank and Farallon Capital were all cornerstone investors, as well as six Chinese companies and asset managers, including China Life Insurance and Ping An Insurance.
The combined support of these experienced distressed asset managers made global institutional investors more comfortable with Cinda and the valuation of its assets, which include billions of dollars of bad debt and questionable loans, as well as equity stakes in hundreds of unlisted state-owned enterprises that it obtained through debt-to-equity swaps.
Stressful outlook
Marks’ comments come as Asia reprices after years of historically low interest rates.
“The corporate debt market here has grown a lot in the last ten years or so, which means there’s more corporate debt out there and in tougher times there will be plenty of distress,” Marks said.
Marks is open to doing investments in emerging Asia when the opportunities arise, but believes investments will be more “rifle shot” than large brush.
Cinda is one of China’s four distressed asset management companies set up in 1999 to acquire and manage a huge amount of non-performing loans from the country’s largest state-owned banks as they prepared for a stock market listing.
Stress is once again rising across the country. In China’s property market new home sales volumes were down 12% in September compared with a year earlier, according to Morgan Stanley research. New home prices were also down in 69 of China’s 70 biggest cities, data from China’s National Bureau of Statistics shows.
This has dragged on housing starts, with residential investment growth falling to single-digit percentage levels, the lowest since July 2012, and a trend that analysts expect will continue as developers work through ballooning inventory.
Then there’s the Agile Property debacle. The company in September launched a HK$2.75 billion ($348 million) rights offering under the leads of HSBC, Standard Chartered and Hang Seng Bank, in an effort to help the company repay a $475 million loan due this December.
However, the real estate developer’s chairman Chen Zhuo Lin was taken into custody in October, forcing Agile Property to shelve plans for its rights offering.
Agile has been granted temporary relief after lenders for the $475 million loan facility agreed to extend the maturity up to $265 million for another year. The lenders were HSBC, Standard Chartered and Hang Seng Bank.
The remaining $210 million will be raised via a rights issue, underwritten by Chen and the controlling family. If investors do not purchase the shares, the controlling family will buy the shares themselves. (It is not clear if Chen has done any wrongdoing. In China, authorities can hold prospective witnesses as well as suspects.)
Other listed Chinese real estate developers have performed poorly this year. Shares in Country Garden, controlled by the country’s wealthiest woman Yang Huiyan, have dropped 27% this year. Shui On Land, the property development arm of Shui On Group, are down 21% year-to-date, and CIFI Holdings is down 9% so far.
Cinda’s shares are down about 25% so far this year on its heavy exposure to the Chinese property sector.
