Nonperforming loan portfolios in Asia are selling cheaply, and some of those assets are expected to end up in securitizations eventually, bankers and analysts say. But most believe the potential issuers are likely to wait out the current turbulence in the region.
Observers singled out China in particular as offering opportunities to buy distressed assets on the cheap, with Korea and India also getting mentions.
"I think there have been published estimates that as much as one-third of the loan portfolios in the state-owned Chinese banks are nonperforming. It's some crazy number like that," one banker said. "I think when people buy them, they'll look at financing them any number of ways. Securitization is one option."
But that option will require some waiting. "I think, in general, people who have bought these assets are trying to let them stabilize," he said, adding that both U.S. and foreign firms are on the buying end.
Marie Lam, an analyst from Moody's Investors Service, said nonperforming loans in China should generate "solid opportunities" for securitization.
Although there are still legal and regulatory barriers to overcome, some banks are reported to be interested in issuing debt backed by their nonperforming loans,
She cited a pioneer transaction from 2003, where the state-owned China Huarong Asset Management Corp. packaged a portfolio of 256 nonperforming loans into a trust and issued senior beneficial interests to investors. The corporation retained the junior beneficial interest.
Lam said the transaction used only basic securitization principles and isn't a true asset-backed deal. But, she added, "It represented a very encouraging start for securitization in China."
Although growing Asian real estate portfolios have played an important role in the asset-backed sector for some time, the burgeoning consumer finance industry in the region is helping to create a new dynamic. One result: The portfolio, or whole loan market, has been taking off, particularly as banks are getting more eager to dump nonperforming loans, according to the banking source.
"I think that is relatively new," he said. "What we're seeing is the large, particularly state-owned, banks are saying, "Look, I need to get liquidity.' So they're actually starting to sell parts of their portfolio."
The reasons behind the selloff vary. "A lot of Chinese banks, for example, have been dumping [portions of] their troubled portfolios because [they] want to start getting listed and get more capital," the banker said. "In order to have credibility in the marketplace, they need to clean up their portfolios."
How soon that might translate into deals is only guesswork, with some more upbeat than others. "It's a little futuristic right now - let's put it that way," the banker said. "I mean, if you think about all the U.S. securitization programs, or even non-U.S. ones, most of the assets being securitized are not distressed portfolios."
Lam said many
people in China's banking industry see potential for using securitization to manage nonperforming loans. But she added, "It will be a matter of time and hard work for the potential to come
In China, four state-owned asset-management corporations, set up in 1999, purchase nonperforming loans from four state-owned banks. These corporations manage and dispose of the loans using different methods. Now that Huarong AMC set a precedent with its trust, Lam said there is a possibility other asset-management corporations will follow.
Some observers suggest the state-owned entities represent only part of the potential. They also see other issuers emerging eventually, given the rise in whole loan sales.
An improving environment
Despite the recent turbulence in the region - and the Korean credit card woes - buyers apparently see some value in the distressed assets and reason for optimism. Speaking of the regional economic situation, one source commented, "I can't call it volatility.' It's not like the Asian Contagion of a few years ago, where there was just a pure sell on the whole Asia-Pacific region. This is clearly
something that is a much more stable trajectory of growth in all the economies."
That upward mobility is the main reason why these loan sales are generating interest. "It's now started to allow a lot of institutions to finally begin - for lack of a
better description - to mark their portfolios to market and sell them," a source said.
"They're selling, in effect, on the strength in the economy," the source added. "That's why we think people are willing to deal at prices that are distressed, because there are enough good things going on in the economy to offset the risks."