Amid rising defaults and tighter liquidity for Chinese privately owned enterprises, the nation’s banks are letting some companies fail, something Deutsche Bank AG says presents bigger opportunities for foreign investors in troubled debt.
The German lender is an active distressed player in the Asia-Pacific region and has bet on some of the biggest restructuring, including commodities trader Noble Group Holdings Ltd.
China is taking steps to allow more foreign investment in the nation’s 2.37 trillion yuan (US$345.5 billion) non-performing loan (NPL) market. It is to give US investors direct access to the nation’s soured debt market as part of this week’s “phase 1” trade deal.
“There are signs we are seeing the beginning of a distressed debt cycle in China,” Deutsche Bank Asia Pacific investment bank cohead Amit Khattar said in an interview. “Distressed debt in China is going to be really interesting.”
Defaults in China’s onshore corporate bond market hit a record high last year and troubles have continued in the offshore market as well.
State-backed Qinghai Provincial Investment Group Co (青海省投資集團有限公司) missed a coupon payment on a US dollar bond due last week and there have been jitters over luxury clothing giant Shandong Ruyi Technology Group Co (山東如意科技集團), whose unit missed a payment on a loan facility last year.
During the global financial crisis, China distress “didn’t play out” because banks came to the rescue, but that is not happening at the same pace anymore as lenders refocus on asset quality and profitability, Khattar said.
China’s pile of bad debt is one area in which the firm potentially sees an opportunity.
The nation’s asset management firms have dominated the market so far, but as defaults rise the pool of soured debt is increasing. Most of the onshore debt nonpayments have been for private companies.
“Traditionally, it’s been harder to buy secondary loans in China and we haven’t been particularly active in China NPLs,” Khattar said. “If the pace of distress creation goes up, then foreign firms will have a greater role to play.”
Deutsche Bank has also been active in India, its other main market for financing and distressed business in the region.
It has deployed a “significant amount of capital” in India’s shadow banking sector and sees a strong “risk-reward” from lending to stressed companies, Khattar said.
However, there have been surprises for foreign investors, notably a court ruling last year on recovering funds in relation to Essar Steel India Ltd, one of the nation’s so-called “Dirty Dozen” that were pushed to the bankruptcy courts in 2017.
That was resolved late last year and the pace of distressed activity is likely to pick up with that, though there have been delays, Khattar said.
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