Cinda IPO to test investor appetite for China's bad debt


* Sources say IPO could raise up to $2 bln

* IPO set to provide insight into China's bad loan problems

* Cinda the most profitable of four China bad loan managers

By Gabriel Wildau and Elzio Barreto

SHANGHAI/HONG KONG, Nov 8 (Reuters) - China Cinda AssetManagement gained approval for a Hong Kong IPO that sources saycould raise up to $2 billion, kickstarting a deal that willoffer clues as to whether the company - created for a governmentbailout - can transform into a profit-driven entity.

Investors are eagerly awaiting forthcoming details from thebad loan manager, whose fundraising is part of China's broaderefforts to recruit private capital to help clean up rising baddebts in the financial system.

Cinda is one of four asset management companies that Beijingestablished in 1999 to absorb toxic assets held by the China'sfour biggest banks. It is the most profitable and the first ofthe four to seek a public listing, with company disclosuresshowing large and steady growth of its operations.

Fund managers and investment bankers positive about the dealsay demand for the company's services will rise in sync with theincrease in non-performing loans across the country. One bankerinvolved in the underwriting said investing in Cinda can also bea hedge against China's banks, whose profit growth is slowing.

Other financiers are more bearish on the offer, pointing toa lack of clarity about Cinda's bad loan pricing policies, itsrecovery rates, and its effort to diversify into other financialservices.

They also worry that a company set up by Beijing to clean upfinancial messes may not be able to deliver steady profits.Cinda's largest shareholder is the finance ministry, which owns83.5 percent while the national pension fund holds about 8percent.

"With state-owned companies there's always the risk they'llbe asked to do national service," said Chris Ruffle, portfoliomanager at Open Door Capital Group, a Shanghai-based hedge fund.

When the bad loan firms were created, they borrowed moneyfrom the banks they were assigned to, using the cash to buy thedebt. Cinda was set up to take on the bad loans at ChinaConstruction Bank, the country's No. 2 lender.

Hiving off the non-performing loans allowed China's Big Fourbanks to restructure, with Industrial and Commercial Bank ofChina becoming the first to list in 2006.


Cinda has said its asset management business made a netprofit of 7.2 billion yuan ($1.2 billion) in 2012, a rise of 6percent over the previous year.

It has stakes in a raft of companies obtained throughdebt-to-equity swaps, including holdings in Aluminum Corporationof China (Chalco) and China Gezhouba Group, the main construction firm in charge of the massiveThree Gorges Dam project. It has property holdings worth atleast 2.3 billion yuan, mostly seized from companies that failedto pay their loans.

"This is going to be a really interesting prospectus to gothrough," said Mike Werner, a Sanford Bernstein analyst whocovers China's banks. "There seems to be a lot ofmis-information about the company. I think Cinda has changedwhat it does over the years, but until we see the listingdocuments, it's hard to say for sure."

In March of 2012, Cinda raised $1.6 billion by sellingshares in the company to four investors, which included SwissBank UBS and Asia focused bank Standard Chartered.

For the IPO, Bank of America-Merrill Lynch, GoldmanSachs, Morgan Stanley and UBS are among theunderwriters on the deal, according to people familiar with thematter.


Official data shows that non-performing loans at Chinesebanks stood at 540 billion yuan, or 0.96 percent of commercialbank loans outstanding, at end-June, but most analysts believethe true ratio is between 2 and 5 percent.

China's banking system could produce around 3.86 trillionyuan in bad loans over the next five years, UBS banking analystsestimated in a June 6 research report.

In disclosures related to a bond issuance last year, Cindapromoted itself has having "deep experience in the disposal of non-performing assets, including best-in-class pricing abilityand innovative disposal tactics via diverse channels." Itdeclined to comment for this article.

Since the government required Cinda to purchase most of itsbad loans at above-market prices, it remains unclear whether thefirm possesses genuine expertise in pricing the debt.

"There was never a fair and open market (for bad loans). I'mnot convinced they're particularly great at it," said FraserHowie, director of brokerage Newedge Financial in Singapore andco-author of Red Capitalism, a book about China's financialsystem.

Cinda purchased 2.6 trillion yuan in non-performing loansbetween 1999 and 2005, with the initial tranche worth 1.2trillion yuan purchased at 100 percent of face value. A secondtranche in 2004 to 2005 was bought at between 26 and 50 percent,according to Trevor Kalcic, Asia financials analyst for CIMB inHong Kong.

Kalcic and other analysts estimate that recovery rates fornon-performing loans acquired in that period averaged aroundjust 20 percent. He also notes that since 2010 new bad assetspurchased by the four asset management firms include bank loans,corporate receivables and trust loans that have been purchasedat market rates.

All four asset management firms have gained licenses toengage in a broad range of financial services but it is also notclear to what extent they will develop their non-performing loanoperations.

Cinda alone has licenses for investment banking, securitiesbrokerage, fund management, trust, private equity, insurance,real estate development, and financial leasing.

Cinda has said it held 7.2 billion yuan in bad loans at theend of 2011 but has not disclosed any breakdown, causing someanalysts to worry that it still may be saddled with legacy debtstaken on between 1999 and 2005.

"That's my question if I'm investing: 'What am I actuallybuying? What exposure am I getting here?'" posed Howie, the RedCapitalism author. "That's not clear to me."

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