Cinda Asset Management, one of China’s state-owned asset management companies (AMC) created to buy up non-performing loans, is expected to apply to go public in Hong Kong next month.
The IPO is expected to raise $US2.5 – $US3 billion. The South China Morning Post reports that bankers handling the transaction say the listing has already “already attracted strategic investors due to its business’s ‘counter-cyclical’ nature at a time when growth in the world’s second-biggest economy is slowing.”
Over the years, Cinda has acquired licenses to operate other businesses like fund management and insurance, but it largely remains a bad bank with a significant part of its operations revolve around nonperforming loans
So, why are investors flocking to buy a bad bank?
“On the face of it, to say Cinda is listing, is like saying the Resolution Trust Corporation is listing,” chief strategist at Silvercrest Asset Management Patrick Chovanec told Business Insider. “You’re supposed to be the junk pile. You’re the entity that is, at least the understanding is, you’re the junk pile and you’re basically insolvent, and the only reason you’re not insolvent is the government implicitly stands behind you.”
Chovanec believes that one option Cinda may consider is to spin-off the other healthier businesses and list them. But this would be quite different from saying Cinda, as an entity, is listing. Of course to know more about that we’d have to wait for the prospectus and see how they value their assets.
So, we move on to the question of why is this attractive to investors?
The financial sector is “very lucrative” at the moment says Chovanec. While international investors may have pulled, out domestic investors have not.
“To the extent that any bank in China has a lucrative business I would question whether that really reflects the true risk of the business, the potential losses. On the face of it, Chinese banks are outrageously profitable and so maybe if that’s what they’re listing, that might well be attractive. That’s what makes me believe this has got to be a carve out of the lucrative operations from the licenses that they own. That’s the only thing I can figure. Cause everybody wants a piece of the financial industry in China, domestically.”
There has been chatter about Cinda listing for some time now, so can we realistically expect it to apply to list next month?
Chovanec says that will likely be contingent on how the “economy and the financial stability in China play out over the next several months.” After the cash crunch in June, policymakers will be watching for liquidity issues since they have always been concerned about IPOs diluting liquidity in the market.
Cinda has reportedly already attractive investments from pre-IPO buyers according to the SMCP which includes investors like UBS, Standard Chartered, Carlyle Group and Boyu Capital.