China Cinda Asset Management Corporation has spent the past 13 years magically defying all predictions of its impending demise.
On March 16, the AMC, one of four set up by Beijing in 1999 as a warehouse to store Rmb1.4 trillion ($222.2 billion) in soured bank loans, pulled another rabbit out of its hat.
This one involved capital commitments from four heavyweight strategic investors. UBS will buy 5% of Cinda, with Citic Capital and Standard Chartered securing 2% and 1% respectively. The National Council for Social Security Fund, China’s pension fund, bought shares equivalent to 8.54% of the distressed debt vehicle.
Cinda issued new stock to complete the deal, with the ministry of finance remaining Cinda’s largest shareholder.
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| Cinda’s value based on the new stock issued |
Altogether, the four stumped up Rmb10.4 billion for a 16.54% stake, valuing Cinda at $10 billion. They are barred from selling their stakes during the next three years. Cinda might remain a largely unknown prospect – an AMC that, as Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics (PIIE) in Washington, points out, posted "no profits" at all for 10 years.
Stupid money
Meanwhile, distressed debt experts in Beijing reacted to the deal with disbelief. One stated simply that the deal involved "stupid money chasing stupid money".
However, others believe Cinda might have a few more surprises left in its box of tricks. The capital injection paves the way for Cinda to complete an initial public offering on foreign and domestic stock markets, probably in 2013 or early 2014.
Zhang Weidong, a board secretary at Cinda, said the company would seek a listing when it was ready to do so, noting: "Preparation is under way, but there is no firm timeline."
The company, which has long harboured ambitions of becoming a listed vehicle, posted earnings of Rmb6.38 billion last year, its first full year of profitability since 2000. At end-2011, it boasted total assets of Rmb172.4 billion.
Zhang said the capital injection and the boost to its reputation provided by UBS and StanChart would help Cinda build out its existing range of non-bank financial services, allowing it to expand further into investment banking, mutual funds, financial leasing, and asset and wealth management.
Two further questions lead from here. First, is Cinda ready for the searing scrutiny of a foreign listing? It, after all, was merely a dustbin for dud loans when it was set up in 1999. And second, are any of the other AMCs – Huarong, Orient and Great Wall, the latter two seen as laggards in the field – ready to follow Cinda’s lead?
Cinda is favoured in Beijing. China’s authorities and regulators would not have let UBS and StanChart complete their investment, or permitted Cinda to reveal even the fuzziest of listing plans, if they weren’t reasonably sure of its long-term prospects.
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| May Yan, analyst, Barclays Capital |
Cinda has, in fact, been marked out for pilot reform – notes May Yan, an analyst at Barclays Capital in Hong Kong – since 2010, when the finance ministry boosted Cinda’s capital reserves by Rmb15 billion. In what was essentially another state-backed capital injection, the ministry also carved out the firm’s bonds into a fund jointly managed by the finance ministry and the AMC, using Cinda’s predicted future income tax payments as collateral. It seems to have worked. "Since Cinda launched its commercialization reform in 2010, principal repayment has been on schedule," says Yan. "We expect Huarong and Orient to follow similar reform strategy and pay down their bond principals over time."
China’s decision to play a long game with its AMCs appears to be tentatively bearing fruit. Cinda is the right candidate to kick-start this pilot reform, analysts say. It owned Rmb60 billion-worth of equity in 170 Chinese companies at end-2011, according to company statements, with the bulk of its profits earned by bad-debt management. Cinda also branched out into securities lending, insurance, futures, trusts, fund management and real estate.
Yet the barriers to listing remain immense. Cinda is not a bank. It cannot disburse loans, unlike China Construction Bank, its second-largest shareholder, and the source of most of its non-performing assets.
It remains burdened with many of those soured loans: the finance ministry has carved out some, but more remain.
If Cinda fails to convince investors in Shanghai and Hong Kong that it is worth a punt a few years from now, the chance of an IPO by Great Wall, the conduit for Agricultural Bank of China’s worst legacy loans, is slim to nil.
Yan remains optimistic that it will happen, noting if all four AMCs move "at full speed", all their debts will be fully paid off by the end of 2017.
China’s AMCs historically tend to be more tortoise than hare, going at their own speed, in whatever direction the prevailing wind pushes them. But if any AMC is likely to complete a listing and go from laggard to leader, it is Cinda.
Only then will UBS and StanChart be cast as wise and sagacious strategic investors. Until that happens, the jury will remain out.
