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Special Situations

Bain Capital Eyes Diversified Distressed Deals In China Ahead Of A Long, Flattened Credit Cycle

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A distressed property project in Anhui province. China now has around RMB1.67 trillion non-performing loans outstanding and RMB3.4 trillion special mention loans.

For global alternative investment manager Bain Capital, the first closing of its Asian credit fund at US$557 million came at the right moment. Bain Capital Credit, the credit affiliate of the firm with more than US$35 billion in assets under management globally, is building a war chest in Asia for the first time to tap into maturing distressed debt investment opportunities emerging across the region.

“There is a nice mix of interesting investment markets across Asia. Each market has a different focus and strategy,” Kei Chua, a Hong Kong-based managing director of Bain Capital Credit, explained his views on Asian’s special situations market during an interview with China Money Network. “Non-performing loan is seen as an important theme in China. There are quite a lot of distressed assets in India, while obviously Australia has many opportunities related to commodities.”

For distressed debt investors, the Chinese market represents one of the most attractive in Asia. A structural shift toward slower economic growth coupled with years of debt binges have created a “perfect storm” for distressed investing. But with Beijing carefully balancing financial stability and cleaning up bad loans, investors see a longer, broader and flattened out credit cycle ahead. That means distressed asset investing in China right now – compared to the last couple of cycles – needs to be more selective, diversified, nimble and operationally involved.

For example, Bain Capital Credit is looking beyond China’s non-performing loan (NPL) sector, which has traditionally been a main focus of the special situations market in the country. One area the firm is actively seeking to invest is what it calls “financing solutions,” where Bain provides capital of last resort to entities that have fallen on hard times.

“If you think about all the Chinese companies that have gone overseas and purchased trophy assets for hefty dollars, they are now facing the flip side where capital control measures and tightened bank lending are forcing them to unwind,” Kei Chua said. “There are going to be assets for sale and opportunities for investors to put money to work.”

Some of the most aggressive Chinese buyers overseas during the past few years include HNA Group, Fosun Group and Dalian Wanda Group. All have been facing liquidity or financing challenges.

HNA Group, after a debt-fueled global acquisition spree mounting to US$40 billion in total, had to scrap plans to issue bonds several times this month. Reports of the company’s subsidiaries having difficulty repaying short-term debts are adding pressure to the company’s liquidity crisis. The company is reportedly selling about 20 commercial properties abroad. Fosun Group just sold off a property in Sydney. During the summer, Wanda Group sold US$9.5 billion of assets to a pair of Chinese developers and is rumored to be selling several overseas property projects at the moment.

“Bain Capital can provide solutions across the capital structure from senior financing, junior financing and everything in between. We are also actively evaluating structured asset backed vehicles and sales lease-back vehicles to provide additional financing solutions,” said Chua, adding that these situations are likely to create some of the best opportunities in 2018.

As a relatively new player in the Chinese distressed debt market, Bain is taking a diversified investment approach, seeking opportunities in three key themes: deleverage, financing solutions and distressed assets. These themes often overlap and are closely intertwined.

For example, Bain bought its first Chinese non-performing loan portfolio worth US$200 million in principal from a Chinese asset management company in May. Now the firm is working out some of its cherry-picked projects to potentially involve deleveraging companies’ balance sheets while providing creative financing options in a distressed situation.

As loans are often collateralized by real estate in China, investors like Bain can help the borrower go through a liquidity rough patch by providing nimble and flexible capital. Depending on a borrower’s condition, a buy-and-lease-back deal could be done, or the borrower could sell the property now and be permitted to buy it back in the future. The types of capital solutions can come in dozens of personalized ways to fit the needs of the borrower.

That flexibility comes at a nice premium, of course. Bain declined to discuss financial details of its deals, but other investors China Money Network talked to indicate that emergency bridge loans cost as much as 36% annualized rate in China, the highest rate deemed legal by China’s Supreme People’s Court.

Indeed, China’s RMB1.67 trillion (US$254 billion) total non-performing loans and RMB3.4 trillion (US$517 billion) special mention loans in the official banking sector is only one piece of the Chinese distressed debt market that appears increasingly appealing to investors.

But this market has attracted the most attention. Prices of some NPL portfolios in China have doubled or tripled in price during the past year because of new investors entering the market and underlying real estate assets having experienced massive price increases. But Bain believes that there are still opportunities to make money in this feverish market environment. Deals just need to be more selective.

Looking ahead, 2018 is destined to be a busier year as Bain looks to pick gold from China’s towering bad debt mountain.

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