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Deal Talk – Investors warm to soured Asia loans; returns may dip

Posted on: May 31, 2009


Reuters – Thursday, May 28

* Asia NPL market set to grow with corporate restructuring

* Returns may be lower than in Asian crisis in late-1990s

* China and South Korea in focus

By Kim Yeon-hee and George Chen

SEOUL/HONG KONG, May 27 – Asia’s bad-loans market is set to grow through next year as the global slowdown takes a toll on banks’ assets that have grown rapidly, but investors may find pickings are not as rich as they were a decade ago during the region’s financial crisis.

Liquidity pressures, higher delinquency levels from mortgage and project finance loans and harsh restructurings are expected to contribute to a growing supply of distressed debt coming on to the market.

But competition from new entrants, including mutual savings banks in South Korea, and stronger balance sheets at Asian companies than during the 1997/98 crisis, have lifted the valuations of non-performing loans in the region.

Sellers are also reluctant to accept fire-sale prices, after they saw their problem loans rebound strongly in the years after the Asian crisis, helping foreign buyers such as Lone Star [LS.UL] and Cerberus Capital Management reap hefty returns.

In South Korea, NPL purchase prices are now 60-70 percent of face value, compared with 30-50 percent a decade ago, according to data from two industry players.

Kyung-Jae Yu, KPMG Advisory’s managing director, said NPL investors seek average returns of 20 percent or higher, but he noted some new investors, backed by ample liquidity, have settled for returns of “around 15 percent on average.”

Korea Exchange Bank <004940.KS>, South Korea’s sixth-largest lender, sold 209 billion won of NPLs at 65 percent of face value to a thrift <007200.KS> last week, a media report said on Wednesday. The purchase price was 5 percentage points higher than the level of the second half of 2008.

ASSETS FOR SALE

GE Capital, Pinetree Capital <PNP.TO>, Clearwater Capital and Angelo, Gordon Asia Ltd have been among firms looking to buy soured loans in Asia, market sources said. Standard Chartered <STAN.L> <2888.HK> and Deutsche Bank <DBKGn.DE> are also chasing bad loans from Asian banks, according to the sources.

GE Capital, Pinetree, Clearwater and StanChart declined to comment to Reuters about their NPL investment plans. Deutsche and Angelo, Gordon officials could not be contacted for comments.

“As an institutional investor, it’s prime time for you to buy distressed assets,” said Philip Groves, managing director of alternative asset firm DAC Management in Hong Kong, which is looking to buy NPLs in Asia.

Investors are expected to be especially active buying bad loans backed by property such as factories, office buildings, and large commercial buildings, said Kim Seok-sun, vice president of Tong Yang Securities’ NPL team in Seoul. Struggling small- and medium-sized enterprises are also expected to attract interest.

But wide price gaps in China and a lack of soured loans arising from big companies in the region have left some foreign houses on the sidelines.

Still, more foreign investors are seen returning to Asia’s bad-loan market. With China and South Korea calling for bolder restructuring in the corporate sectors, some companies unable to repay loans are likely to put assets up for sale.

The gross NPL ratio in banks across Asia Pacific is expected to rise to 2.0 percent in 2009 from 1.6 percent at end-2008, according to a recent report by Bank of America-Merrill Lynch.

PricewaterhouseCoopers said in the latest edition of its NPL Asia publication that Asia’s bad-loan market will soon become a buyer’s market as the valuation gap between what sellers are demanding and investors are willing to pay shrinks.

The total size of banks’ NPLs in Asia-Pacific was $1.73 trillion at the end of 2008, PwC data showed.

Fitch Ratings also said in a recent research note that Chinese banks face growing medium-term risks as they rush to pour money into investment projects with dubious earnings prospects. [ID:nPEK6592].

“Like the villain in a horror movie that you thought was dead, China’s problem with non-performing loans might be about to lumber back to life,” said Tom Orlik, China economist at Stone & McCarthy in Beijing.

(Additional reporting by Samuel Shen in Shanghai and Alan Wheatley in Beijing)

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1 Response to "Deal Talk – Investors warm to soured Asia loans; returns may dip"

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