Coronavirus thwarts vulture funds’ efforts to finally smash China

BEIJING / SHANGHAI (Reuters) – Vulture funds encouraging freer access to China’s $ 1.5 trillion in bad debt have headed straight for a thorny market complicated by restrictions on coronaviruses, at a time when similar restrictions offer opportunities in developed markets easier.

FILE PHOTO: People look at the skyline of the central business district in Beijing, China April 16, 2020. REUTERS / Thomas Peter / File Photo

China agreed to fully open its non-performing loan (NPL) market during the first phase of the Sino-U.S. Trade deal in January, allowing foreign investors to purchase loan portfolios directly from Chinese banks, without local intermediaries.

Struggling debt specialists – or vulture funds – have been calling for easier access to NPLs for years, drawn by Beijing’s determination to modernize the market as well as the expectation of an increase in bad loans as the Chinese economy is slowing down.

NPL’s foreign investors, including Oaktree Capital Management LP, Lone Star and Bain Credit, closed a record 14 NPL deals in China last year, with a combined value of $ 1.1 billion, data shows from the consulting firm PwC.

Before the novel coronavirus began to strangle much of China’s economy in February, PwC said deregulation would be a “game changer” for the role of foreigners in the country’s bad debt market.

But efforts on the ground to take advantage of easier market access have been hampered by travel limits imposed to stop the spread of a virus that was first reported in China at the end of the year. last and has since killed more than 184,000 people worldwide.

“What investors can do right now is just a ‘computer review’,” said John Xu, Shanghai-based partner at Linklaters LLP, referring to project analysis via images and files. digital.

“Pending transactions are stalled and term sheets with signatures have piled up on the desk,” said Xu, whose clients include a New York-based bad loan company.


Vulture funds have also faced what they see as a lack of clarity regarding the regional licenses needed to operate local asset management companies (AMCs), Xu said.

The funds balk at the uncertainty of how long it takes to receive the licenses, or whether applications could be hampered by local unofficial license quotas, Xu said.

“I’m dying that we can all travel more and then talk to regulators about their preferences and concerns,” said Singapore-based managing director Avery Colcord of US alternative investment fund manager CarVal Investors. .

CarVal made two deals in China in 2018, PWC showed. He is currently considering launching a local currency fund, Colcord said.

Colcord said CarVal was in talks with regulators in Shanghai over a local AMC license application, but the company was “in the early days of learning what a provincial AMC would be allowed to do.”


Some funds have also been distracted by opportunities in better-known markets such as Europe and the United States, where virus restrictions have seen companies grapple with forced shutdowns and customers confined to their homes.

At least one global vulture fund has assigned some of its staff in mainland China to analyze overseas opportunities, said a person from the fund familiar with the decision, who was not authorized to speak to the media and therefore has refused to be identified.

“Major distressed debt funds are likely to prioritize the European and American markets in terms of investment and energy for at least two years,” said a mainland China-based credit banker at a large firm in Wall Street, highlighting the appeal of the more established. procedures and practices in mature non-performing loan markets.

“China is sizeable in size, so foreign companies are naturally interested, but it’s an afterthought given the current situation.”

Reporting by Cheng Leng, Samuel Shen and Ryan Woo; Editing by Jennifer Hughes and Christopher Cushing

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