Investing in Non-Performing Loans
Currently, Chinese banks have the highest ratios of NPLs in the world due to the former politically based lending practices of China’s four state-owned banks. For many years in Communist China, state-owned enterprises had easy access to low or no-interest loans which were routinely provided to them by the four major state owned banks. As the state owned banks were not profit-driven, little effort was made by the banks to compel the state-owned enterprises to repay these loans. As a result, as of 2000, the four major state-owned banks had amassed, by conservative estimates, over US $400 billion in non-performing loans (“NPL”).
In 2000, the Chinese government prioritized cleaning up the state owned banks’ balance sheets to save them from insolvency, to ready them for public listing and to make them competitive in time to fulfill China’s World Trade Organization obligations. In accord with this policy the government established four asset management companies (“AMC”), one for each of the major state owned banks, to which the banks transferred NPL with a face value of 168 Billion USD to the AMC.
In 2001, the Chinese government began focusing on bulk sales of NPL to foreign investors. The first transactions were highly publicized auctions, such as the purchase by Goldman Sachs and a Morgan Stanley-led consortium of US$1.5 billion at 8% of the original principal balance of the loans.
From 1995 to 2002, The Chinese government restructured and arranged for the state owned banks to extend loans to several thousand state owned enterprises. As of 2002, no payments of either principal or interest had been made on fifty percent of those loans. In 2004 and 2005 additional NPL with a face value of 150 Billion USD was transferred from the state owned banks to the AMCs.
Due to the explosive growth in China’s economy, while loans secured by assets (such as real estate or operating units owning real estate) may be classified as non-performing, the current fair market values of the assets securing the loans can greatly exceed the deeply discounted cost of the NPL. Therefore, the acquisition and disposition of NPL present enormous investment opportunities with extremely attractive returns for investors who have knowledge of the true value of the assets and the experience and capabilities necessary to convert them to their highest and best use.
Alpha & Leader Group acts as the lead financial and legal adviser to every major participant involved in every facet of the sales, acquisition and disposition of NPL.