Document 7570116
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Transcript Document 7570116
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Disposal and Securitization of
Non-Performing Loans in China
Carson Wen
April 2005
Heller Ehrman White & McAuliffe
Overview
NPL Portfolios
Methods and Alternatives for Disposal
NPL Disposal in China
NPL Securitization
Deciding on the Structure
1
Heller Ehrman White & McAuliffe
Overview - Major Banks
4 state-owned commercial banks
("SOCBs")
Industrial and Commercial Bank of China
("ICBC")
Bank of China ("BOC")
China Construction Bank ("CCB")
Agricultural Bank of China ("ABC")
2
Heller Ehrman White & McAuliffe
Overview - Major Banks
3 government-run non-profit policy banks
State Development Bank ("SDB")
Import and Export Bank of China
Agricultural Development Bank of China
11 joint-stock commercial banks
3
Heller Ehrman White & McAuliffe
NPL Portfolios of Major Commercial Banks
As of Dec. 31,2004
RMB 100 mil.; %
Outstanding Balance
NPLs
Share in Total Loans
17176
13.21
Substandard
3075
2.36
Doubtful
8899
6.84
Loss
5202
4.00
SOCBs
15751
15.62
JSCBs
1425
5.01
By Five-category
Classification
By Institutions
Note: The major commercial banks include SOCBs and joint-stock commercial banks (JSCBs).
4
Heller Ehrman White & McAuliffe
Overview - AMCs
Establishment of Asset Management Corporations
in 1999
Cinda - China Construction Bank/China
Development Bank
China Great Wall - Agricultural Bank of China
China Huarong - Industrial and Commercial
Bank of China
Orient - Bank of China
Must recover NPLs they took over in 10 years
5
Heller Ehrman White & McAuliffe
NPL Portfolios of 4 AMCs
When the AMCs were created in 1999
RMB 1.4 trillion (US$ 169 billion) in NPLs
were transferred to the 4 AMCs
Capital source of transfer
Unit: RMB billion
405
National Funds
Re-loan from People's Bank of China
820
40
Issing bonds to 4 SOCBs
6
Heller Ehrman White & McAuliffe
NPL Portfolios of 4 AMCs
As of end-December 2004
Total resolved NPLs - RMB 675.06
billion
Collection in cash - RMB 137 billion
Cash recovery ratio - 20.29 %
7
Heller Ehrman White & McAuliffe
Disposal Progress of AMCs in 2004
(Totally)
800
25.00%
700
19.95%
20.29%
20.46%
19.89%
675.06
20.00%
600
587.62
567.26
528.68
15.00%
Ratio
Amount
500
400
10.00%
300
200
4.26%
105.48
2.76%
100
4.72%
4.57%
5.40%
137
120.21
2.68%
112.83
2.68%
5.00%
2.55%
0
0.00%
Q1
Accumulated Disposal
Asset Recovery Ratio
Q2
Q3
(Cash Recovered)
Cash Recovery Ratio
Q4
Disposal Ratio
Unit: RMB billion
8
Heller Ehrman White & McAuliffe
Disposal Progress of AMCs in 2004
(Respectively)
Unit: RMB billion
450
Total NPLs
407.4
Disposal Amount
373
400
Collection in Cash
345.8
Cash Recovery Ratio
350
267.9
300
250
209.54
209.91
200
151.06
150
104.55
100
50.81
41.34
50
23.29
21.57
19.73%
10.27%
22.27%
33.64%
0
Huarong
Great Wall
Orient
9
Cinda
Heller Ehrman White & McAuliffe
NPL Securitization in China - Factors
Affecting the Market
Onshore vs. offshore
investing entity
Court enforcement
Fees to transfer assets
Employee liabilities
Repatriation of capital
Taxation
Foreign investor rights
and ownership
Processing time
Land-use rights
Execution
Political issues
Remedies and
foreclosure laws
Bankruptcy laws and
creditor rights
10
Heller Ehrman White & McAuliffe
Draft PRC Enterprise Bankruptcy and
Reorganization Law
Anticipated enactment in 2005
Would be universal
Would apply to all enterprises
Except individuals (consumers) and possibly
financial institutions
Phase in period for SOEs
No prior government approvals needed
Modelled on international standards and
procedures
11
Heller Ehrman White & McAuliffe
NPL Disposal Strategies for Ultimate Resolution
Retain, Work Out and Recover on
NPLs
Direct Sales
Servicing Transfers
Joint Ventures
Securitization
12
Heller Ehrman White & McAuliffe
NPL Disposal - Direct Sales
Most efficient alternative for the AMCs and
banks to move NPLs out of balance sheet
Most adopted by the AMCs and banks in
China for the present
Pricing is dependent on the agreement
between seller and buyer as to the likely
amount of recoveries from NPL assets
13
Heller Ehrman White & McAuliffe
New Promulgation re Foreign Capital
Involved NPL Disposal
Effective from 1 January 2005
Decree (2004) 119, promulgated by State
Administration of Foreign Exchange
("SAFE")
Set up rules for direct sale of NPLs to
foreign investors
Disposal related issues: process, documents,
guaranty, FIE, etc.
14
Heller Ehrman White & McAuliffe
New Promulgation re Foreign Capital
Involved NPL Disposal (con'd)
Disposal Process re Foreign
Exchange Issues
Before Sale
Filling
Approval
AMCs
Reparation after
Resale
After Sale
SAFE
Foreign
Investors
Verification
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Local
SAFE
Approval
Foreign
Investors
Local
SAFE
Heller Ehrman White & McAuliffe
Re-disposal for Foreign Buyers
Resale
Set up JV with seller
Servicing transfer
Debt-equity swap
Debt collection through lawyers
16
Heller Ehrman White & McAuliffe
NPL Disposal:
Morgan Stanley - Huarong AMC (2001)
Sale of RMB 10.8 billion NPLs
Huarong AMC
Nov. 29, 2001
Morgan Stanley
Consortium
NPL Investment
The First United AMC
Nov. 26, 2002
Management contract
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Kelley Assets Service
Ltd.
Heller Ehrman White & McAuliffe
NPL Disposal:
Goldman Sachs - Huarong AMC
Sale of RMB 1.97 billion NPLs
Huarong AMC
Goldman Sachs
Nov. 21, 2001
NPLs
Rongsheng AMC
Nov. 25, 2002
18
Heller Ehrman White & McAuliffe
NPL Disposal:
CCB - Morgan Stanley (2003)
CCB
RMB
4.3 billion NPLs
Morgan Stanley
30%
investment
Sale 70%
Morgan Stanley
Cooperative Joint
Venture
The State Council has not approved the structure yet.
19
Heller Ehrman White & McAuliffe
NPL Disposal CCB - Morgan Stanley (2004)
Morgan Stanley
4 billion in-kind
NPLs
CCB
1.4 billion cash
Deutsche Bank
20
Heller Ehrman White & McAuliffe
Sale of NPLs vs. Securitization
Sale of NPLs
More difficult to price
High risk
Illiquid investments
Very few investors
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Heller Ehrman White & McAuliffe
Sale of NPLs vs. Securitization
NPL backed securities (securitization)
Rated securities
Risk dependent on rating
Transparent pricing
Larger pool of investors
Securitization can be done by loan
originator or purchaser of loan
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Heller Ehrman White & McAuliffe
Securitization
Process by which cash generating assets (e.g.
loans or NPLs) are converted into securities
sold to investors
The assets are transferred in a "true sale" to a
special purpose vehicle (SPV) that issues the
securities
The securities are paid from the cash flow on
the assets rather than from the originator (e.g.
NPL owner)
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Heller Ehrman White & McAuliffe
Advantages of Securitization
Improves balance sheet
Swap of lower quality asset (e.g. NPLs) for
higher quality asset (e.g. cash)
Improves funding
Diversification of funding sources
Lower cost of funds
Transfers credit risk of receivables (e.g.
NPLs) to a third party
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Heller Ehrman White & McAuliffe
Disadvantages of Securitization
Transferability of assets may create issues
Must obtain "true sale" opinion from a law firm
Must obtain "true sale" treatment from an accounting
firm
Is the asset owner (e.g. NPL owner) authorized to
transfer the assets?
Does the owner want to transfer the assets?
Security for repayment; remedies - do rights transfer
with the assets?
Increased due diligence
High level of legal complexity
25
Heller Ehrman White & McAuliffe
Basic NPL Securitization Structure
Contract to
manage,
service and
collect NPLs
Servicer/AMC
Notes
NPLs
NPL
Owner
SPV
Investors
Proceeds
Cash
NPLs/Borrowers
26
Heller Ehrman White & McAuliffe
Special Purpose Vehicle (SPV)
Restricted charter
Created for the sole purpose of
holding the NPLs
Limited powers
Limited activities
Designed as "bankruptcy remote"
27
Heller Ehrman White & McAuliffe
NPL Securitization Factors for a Healthy Market
Sound regulatory system
Sound legal system, especially in
bankruptcy and foreclosure, contract and
security laws
Ability to track legal title and ownership of
NPL assets
Quality due diligence
28
Heller Ehrman White & McAuliffe
NPL Securitization Factors for a Healthy Market
Quality valuation of collateral and cash
flows
Not appraisals
Sound cash flow vs. asset-value
methodologies
First-rate servicing, collection and workout
capabilities
29
Heller Ehrman White & McAuliffe
NPL Securitization in China Factors Affecting the Market
Onshore vs. offshore
investing entity
Remedies and
foreclosure laws
Bankruptcy laws and
creditor rights
30
Court enforcement
Fees to transfer
assets
Employee liabilities
Repatriation of
capital
Heller Ehrman White & McAuliffe
NPL Securitization in China Factors Affecting the Market
Foreign investor
rights and
ownership
Execution
31
Taxation
Processing time
Land-use rights
Political issues
Heller Ehrman White & McAuliffe
NPL Securitization in China Legal Problems with Onshore SPV
Companies are supposed to have "active business"
SPV is intended to be passive ownership vehicle
Prohibition on inter-company lending
Valid transfers require notice to obligors
Rules against "debt collection" companies, exception
for banks and AMCs
Foreign exchange control
Repatriate proceeds from disposal of NPLs after the
termination of SPV or by way of dividends
32
Heller Ehrman White & McAuliffe
NPL Securitization in China Legal Problems with Onshore SPV (con’d)
Difficulty for SPV to issue "bonds" (company law)
Net assets≥RMB 60,000,000 (limited liability company)
≥RMB 30,000,000 (company limited by
shares)
Total amount of issued bonds shall not be over 40% of
the company's total net assets
The average net profit of the latest three years shall be
sufficient to pay 1-year's interests of the issued bonds
33
Heller Ehrman White & McAuliffe
NPL Securitization in China Legal Problems with Offshore SPV
Foreign exchange control
Foreign debt registration
Transfer of NPLs to offshore SPV raises foreign debt
registration issue
Who is responsible for the registration?
Foreign investment prohibition
SAFE approval required for the repatriation of
proceeds from disposal of NPLs
Foreign investment industrial policy will affect the
restructure of NPLs portfolio
Other issues
34
Heller Ehrman White & McAuliffe
NPL Securitization:
Deutsche Bank - Cinda AMC (2003)
Cinda AMC
50%
Deutsche Bank
NPLs
50%
Cash
Joint Venture
(SPV)
Suballocation
Overseas Bonds
Deutsche Bank
Investors
Excess
Guarantee
35
Heller Ehrman White & McAuliffe
NPL Securitization in China Trust Structure
Special Purpose Trust ("SPT") -viable
structure for the present
Bankruptcy remoteness
Huarong trust structure - start of asset
securitization in PRC
Quasi-securitization
36
Heller Ehrman White & McAuliffe
NPL Securitization :
Huarong Trust Structure (2003)
Huarong AMC
4.14% expected
annual return
Senior Beneficiary
Rights
PRC
Investors
RMB 1 billion
RMB 13.25 billion
NPLs
Subordinate
Beneficiary Rights
(First Loss)
Trust Pool
Senior/Sub Collateral Enhancement
37
Heller Ehrman White & McAuliffe
ICBC Trust Structure (2004)
Industrial &
Commercial Bank
of China
Placed by CSFB and Citic Securities in the
domestic PRC market
Interest
Class A Senior Trust
Certificates
Senior Holders
Senior Note
Proceeds
NPLs
Interest
Class B Junior Trust
Certificates
Junior Holders
Junior Note
Proceeds
NPL Trust Pool
Senior/Sub Collateral Enhancement
38
Heller Ehrman White & McAuliffe
Asset Securitization Proposed by CCB Unconsolidated Model
CCB
Housing Loans
Bonds/Trust Scheme
Special Purpose
Trust
Domestic Investors
Proceeds
Note: The proposal has been approved by PBC, yet to be approved by the State Council.
39
Heller Ehrman White & McAuliffe
Asset Securitization Proposed by CCB Consolidated Model
CCB
Internal
Department
Own & Securitize
Secured
Housing Loans
Note: Five proposals have been turned down by PBC.
40
Heller Ehrman White & McAuliffe
Asset Securitization Proposed by SDB
Shenzhen
Commercial
Bank
2 Brillion Secured
Housing Loans
Financial Bonds
SDB
Consideration
Proceeds
Inter-bank
Market
Loans
SPV
Phase I
Loans
ABS
Phase II
SPT
Investor
Proceeds
Note:
1.
Phase I: The SPV will earn profit if the interest received from mortgaged loan exceeds the interest of financial
bonds paid to investors.
2.
Phase II: The securitization may be scheduled years later.
3.
It is reported that the PBC might not approve the proposal because it focuses on Phase I aiming to earn profit
through assets held by the SPV and does not reflect the propose of securitization to release financial risks.
41
Heller Ehrman White & McAuliffe
Trust Investment Corporations ("TICs")
Financial institution, under supervision and
control of People's Bank of China ("PBC")
Need PBC's approval to eagaged in inter-bank
borrowing
Prohibited from:
Drawing deposits
Issuing bonds
Borrowing external debts
Providing guaranties with the trust property
42
Heller Ehrman White & McAuliffe
Trust Investment Corporations ("TICs")
Only TICs can operate the business of
capital trust
Limited capability of operation and disposal
of trust capital in a collective management:
Capital trust contracts accepted by TICs ≤
200 pieces
Value of each contract ≥ RMB50,000
43
Heller Ehrman White & McAuliffe
Trust Structure - Issues
Issue of trust certificates
Who can be trustees and issuers?
TIC issues
Circulation of certificates of beneficiary rights
The certificates are not securities
Private raising
Non-standardized certificates
No existing market available for trading
44
Heller Ehrman White & McAuliffe
Trust Structure - Issues
Limited investors
Accounting
Moved out of originator's balance sheet?
Taxation
Trust registration and alteration of the
mortgage registration
45
Heller Ehrman White & McAuliffe
Administrative Measures of Asset
Securitization (Draft)
Expect to launch in first quarter of 2005
Give answers to issues relating to
securitization
Status of TICs acting as SPV
Tax, accounting
Issue and circulation of securitized products
46
Heller Ehrman White & McAuliffe
Administrative Measures of Asset
Securitization (Draft)
The proposal should reflect the purpose of
securitization - release financial risks
Allow securitized products issued and
circulated among inter-bank bond market
Listing and circulation of securitized
product are subject to PBC's approval
47
Heller Ehrman White & McAuliffe
PRC Inter-bank Bond Market
Participants - Institutions only
Commercial banks and their branches
Non-bank financial institutions with legal
status
Non-financial institutions with legal status,
through settlement agencies
Branches of foreign banks that are approved
to operate RMB business
48
Heller Ehrman White & McAuliffe
PRC Inter-bank Bond Market
Trading products
Government
securities
Central bank notes
Policy financial
bonds
Enterprise bonds
49
Trading types
Buying back
Trading of current
bonds
Heller Ehrman White & McAuliffe
Synthetic Securitization
Synthetic securitization may provide a
more attractive alternative to disposing of
NPLs than outright sales or conventional
"true sale" securitization
50
Heller Ehrman White & McAuliffe
Synthetic Securitization
Securitization of NPLs in China has thus far focused
on conventional securitization
However, there are substantial legal, regulatory and
practical obstacles, principally caused by the
requirement to transfer NPL assets
Synthetic securitization does not involve asset
transfers and thus avoids many of these obstacles
Synthetic structures are gaining increasing acceptance
in Asia
51
Heller Ehrman White & McAuliffe
Synthetic Securitization Structure
Credit Protection
Payments
Credit Default Swap
Protection
Buyer
Premium Payments
Protection
Seller
(SPV)
Note
Proceeds
Investors
Principal and
Interest
Interest on Collateral
Asset Swap
Note
Proceeds
Reference
Pool
Interest on Collateral
Collateral
52
Heller Ehrman White & McAuliffe
Synthetic Securitization - Advantages
No asset transfer (true sale issues, loan consents,
relationship issues, due diligence, costs)
Greater diversity of asset pool
Assets which are not readily transferable, involve
ongoing commitments to lend or guarantee
Relative simplicity to true sale securitization
Lower transaction costs
Documentation - ISDA Credit Derivative
Documentation
53
Heller Ehrman White & McAuliffe
Synthetic Securitization - Disadvantages
New concept in the NPL market
No synthetic NPL deals yet - education of market
But synthetic structures (in non-NPL deals) are gaining
wide acceptance in Asia
Pricing and valuation techniques need to be developed
No transfer of actual NPLs occurs
NPL owner is subject to counterparty risk under credit
default swap
Some NPL owners (e.g. many banks) may want true
sale treatment of NPL transfers - regulatory treatment
unclear
54
Heller Ehrman White & McAuliffe
Deciding on the Structure:
Factors to Consider
NPL acquisition price
Size of NPL pool
Secured vs. unsecured
Servicer/AMC abilities
Location of NPL owner
(structure, taxation,
asset transfer, valuation)
Availability of rating
Availability of credit
enhancement
Availability of
additional collateral
Identity of potential
investors
Capital market factors
Location of NPL
borrowers (creditor
rights, enforcement,
remedies)
55
Heller Ehrman White & McAuliffe
Our PRC Connections
Close relationships with the State
Development Bank and the Great Wall
AMC
Working with the 4 AMCs to find
solutions to disposal of NPLs
56
Heller Ehrman White & McAuliffe
The Company We Keep
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Heller Ehrman White & McAuliffe
Our Expertise and Experience
Lawyers in Hong Kong, Beijing, New York
and other US cities working as a team in
NPL transactions
Expertise in NPL workouts, sales and
securitization
Resources of 700 plus lawyer international
firm, including lawyers specializing in
China practice, securitization, capital
markets, creditors rights and bankruptcy
law
58
Heller Ehrman White & McAuliffe
Our Expertise and Experience
Representative clients include:
Bank of America
Nomura
Resolution Trust Corporation (US)
Washington Mutual
Industrial Bank of Japan (now Mizuho)
59
Heller Ehrman White & McAuliffe
US Offices
San Francisco
San Diego
New York
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San Francisco, CA 94104
2878
Phone: 1 (415) 772-6000
Fax: 1 (415) 772-6268
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Phone: 1 (858) 450-8400
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New York, NY 10036-4041
Phone: 1 (212) 832-8300
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Washington D.C.
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Phone: 1 (907) 277-1900
Fax: 1 (907) 277-1920
60
Heller Ehrman White & McAuliffe
Asian Offices
Hong Kong
Singapore
35th Fl., One Exchange
Square
8 Connaught Place
Central, Hong Kong
Phone: (852) 2292-2000
Fax: (852) 2292-2200
50 Raffles Place
#17-04 Singapore Land
Tower
Singapore 048623
Phone: (011) 65-6538-1756
Fax: (011) 65-6538-1537
Beijing
Units 01-02, Level 14
China World Tower I
1 Jian Guo Men Wai Ave
Beijing
100004 China
Phone: (86)10-5866-9738
Fax: (86)10-5866-9739
61
Heller Ehrman White & McAuliffe
A
T
T
O
James C. Olson
Susan C. Yu
333 Bush Street
San Francisco, CA U.S.A.
Telephone: 415-772-6391
[email protected]
1 Jin Guo Men Wai Avenue
Beijing
Telephone : 86-10-5866-9738
[email protected]
Carson Wen
Michael P. Phillips
One Exchange Square
8 Connaught Place
Hong Kong
Telephone : 852-2292-2288
[email protected]
One Exchange Square
8 Connaught Place
Hong Kong
Telephone : 852-2292-2207
[email protected]
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Heller Ehrman White & McAuliffe