Investors love Cinda IPO

Chinese asset management company Cinda is shaping up to be the hottest initial public offering of the holiday season. Hedge funds and other investors are pouring cash into the offering, hoping to capitalize on the growing pile of debt expected to go bad.

The Wall Street Journal offered this list of investors:

China Cinda Asset Management Co. has lined up 10 cornerstone investors to take up 44% of the funding it seeks to raise—up to $2.46 billion—in its initial public offering, people familiar with the deal said Sunday.

The offering is set to be Hong Kong’s biggest IPO of the year, and if the interest among cornerstone investors is any indication, it may be one of the more popular. The so-called bad bank, whose bread-and-butter business is buying up bad loans from Chinese banks and distressed assets from factories and real-estate firms, could benefit from an uptick in nonperforming loans in China.

The 10 cornerstone investors have together committed to buying $1.09 billion of the IPO.

New York-based Och-Ziff Capital Management Group LLC, which has a strong focus on distressed debt, and China Life Insurance Co. are taking $200 million each, the people said. Norges Bank Investment Management, Norway’s sovereign-wealth fund, is buying $150 million.

Three other investors, including San Francisco-based Farallon Capital Management LLC and Chinese fund Rongtong Capital Management Co. are taking $100 million each.

Ping An of China Asset Management, a unit of Ping An Insurance (Group) Co.  of China Ltd. is investing $75 million and Shandong State-owned Assets Investment Holdings Co. is buying $60 million.

Distressed-investment specialist Oaktree Capital Management, a unit of the U.S.’s Oaktree Capital Group LLC, and Upper Horn Investments Ltd., a unit of Chinese power firm Guangdong Yudean Group Co., are buying $52.95 million and $50 million, respectively, the people said.

Reuters offered this background on the firm’s creation and how investors expect to make money as more people fall behind on their loans:

The offering is set to be the biggest in Hong Kong this year as global investors bet that soured loans will be a growth business in China. It opens a window into how the four firms have managed loans, investments and properties seized from companies unable to repay their lenders as the world’s second-largest economy slowed.

Cinda, the first of the four to launch an IPO, said in a filing to the Hong Kong Stock Exchange that total assets rose 11 percent to 283.55 billion yuan ($46.5 billion) as of June 30, compared to the end of December last year.

The next Chinese bad debt manager expected to pursue an IPO is Huarong Asset Management Corp, which hopes to raise up to $2 billion through a listing though no timetable has been set. Reuters reported the Huarong IPO plans in June.

Created in 1999 to handle the bad loans of China Construction Bank, the country’s No. 2 lender, Cinda said profit attributable to equity holders was 4.06 billion yuan ($667 million) for the six months ended June 30, 2013, up 36 percent from 2.99 billion yuan a year earlier.

In its IPO Cinda is offering 5.32 billion new shares in an indicative range of HK$3.00 to HK$3.58 ($0.39 to $0.46) each.

The MarketWatch story pointed out that the Chinese financial system is become more complex, creating both opportunities and problems for companies like Cinda that are trying to capitalize on the missteps of others:

In recent years, investment trusts, real estate and investment banking have been added to Cinda’s distressed-loan business. It also appears to have done well, with an operating margin of 28% in 2012 referenced in pre-deal research. No doubt China’s asset boom in recent years will have done its part to rescue some of these earlier bad loans.

But going forward, investors will need some comfort understanding its business model.

Indeed, reports suggest Cinda will be using funds raised in this listing — and then some — to help clean up China’s next batch of problem loans. The Financial Times says Cinda is ready to buy 100 billion yuan ($16.4 billion) in bad debt over the next two years.

As concerns mount that China is careening toward a new bad-loan cycle, the reception of Cinda will be a key gauge of how much confidence investors have that the lid can be kept on problem loans.

Optimists will hope that this listing exercise will, at the very least, bring a bit more transparency to China’s murky world of distressed debt.

At a conference on China debt-restructuring opportunities held in Hong Kong earlier this month, a key message was that the next bad-debt cycle will be tougher than the last one.

Not only has the size of China’s financial sector grown exponentially, but it’s also much more complicated. China’s banks are not just much bigger, but also now have operations and listings overseas.

The last time around, for instance, China cleaned up loans without outside help, and it appeared relatively painless, with problem loans taken on at par. This time, however, the size of the financial sector means it may not be realistic to expect a crisis to be handled alone.

And that’s likely why all these U.S. hedge funds and distressed investment vehicles are turning to Cinda. Yields on opaque foreign restructurings will likely be higher than the well-understood reworkings in the U.S. Anything that sheds more light onto the financial sector is a good thing, especially in a country as tightly controlled as China.