China Orient, KKR team up for distressed asset investments

A China Orient Asset Management Corp stand at a finance expo in Beijing. [Photo provided to China Daily]

Two units of China Orient Asset Management Corp, a leading State-owned bad-assets management firm, said on Friday that they had formed a strategic partnership with global investment firm KKR & Co to co-invest in credit and distressed asset opportunities in the Chinese market.

The two companies will look for growing opportunities in distressed debt, especially in the property sector.

Edward Han, managing director and head of special situations at China Orient Summit Capital, in which China Orient Asset Management (International) Holding Ltd holds a controlling stake, said in a statement: "The three companies offer an opportunity to build a scaled platform to provide flexible capital solutions, particularly in the real estate sector which is facing increased macro and funding challenges."

China's real estate market had approximately 21 trillion yuan ($3.19 trillion) of outstanding debt from financial institutions by the end of 2015, making up about 22 percent of the outstanding renminbi loans in China. The debt was predominantly in the form of commercial bank loans, trust schemes and wealth management plans, according to the central bank.

Statistics from the China Banking Regulatory Commission show that the outstanding nonperforming loans of commercial banks amounted to more than 1.19 trillion yuan at the end of September and the NPL ratio rose 43 basis points from a year earlier to 1.59 percent. According to global consultancy firm KPMG LLP, the majority of the collateral underpinning these nonperforming loans is real estate.

KKR said: "In real estate alone, we see a potential $40 billion to $100 billion distressed credit opportunity in China over the next two to five years."

China's distressed debt market is dominated by the four largest State-owned asset management companies, but there have been signs that overseas investors are looking to the rapidly expanding market.

In May, China Cinda Asset Management Co Ltd held a sales promotion of bad assets worth more than 43 billion yuan in Hangzhou, Zhejiang province. The event was attended by nearly 200 institutional investors .

By forming a partnership, international and Chinese investors will be able to leverage their resources and explore more collaboration.

Zhong Guoxing, co-president at China Orient Asset Management (International) Holding, said: "We believe this partnership between a State-owned enterprise, a local investment manager and an international investment firm offers investors a rare opportunity to benefit from the best practices of all three parties."

Wholly owned by the Ministry of Finance, China Orient is close to the end of a shareholding reform that could see the addition of strategic investors and eventual listing of the company.