Expanding Opportunities in China’s Distressed Debt Markets

Recent press reports have noted the mounting levels of distressed debt in China at a time when the country’s GDP growth has plummeted to its lowest level in a decade (albeit still at 6%). Bloomberg has highlighted that non-performing loans (or NPLs) in China exceeded 2500 billion Yuan (the equivalent of US$365 billion) by the end of 2019, more than doubling in the last five years alone due to the economic slowdown and, more recently, the trade dispute with the US. In headier times, China’s troubled companies were regularly propped up by Chinese asset management companies (or AMCs) that were created for that purpose – to prevent borrower distress from stalling the country’s economic growth. These AMCs — often referred to as “bad banks” — include China Orient Asset Management Co. (matched with Bank of China) and China Cinda Asset Management (matched with China Construction Bank) and were organized to allow banks to discard their distressed portfolios in a manner both protective of the banks and the borrowers. In recent years, however, with the greater need for constraint that comes with rapidly slowing GDP growth, more borrowers may be allowed to fail and with that, there should be a need for new participants in the market for Chinese NPLs.

One element of the new “phase 1” trade deal with China has been somewhat overlooked. Buried within the agreement rests Article 4.5 which provides that: “China shall allow U.S. financial services suppliers to apply for asset management company licenses that would permit them to acquire non-performing loans directly from Chinese banks…. When additional national licenses are granted, China shall treat U.S. financial services suppliers on a non-discriminatory basis….” Continue reading Expanding Opportunities in China’s Distressed Debt Markets

Next Wave of Oil and Gas Bankruptcies

A new wave of bankruptcy filings for leveraged oil and gas companies has begun and this time it may involve more prepacks and less optimism. Beginning in late 2015 and continuing through 2017, downtown Houston was filled with bankruptcy lawyers. Highly leveraged exploration and production (or E&P) companies had become crippled by falling oil prices and the resulting impact on the value of their producing and non-producing reserves in their borrowing bases. No one was immune from the effect: servicing companies, suppliers and vendors, mid-stream and up-stream alike, all operating in a changed market. Many of these borrowers, however, anticipated a near term upswing in the price of oil and commenced their chapter 11 cases with that in mind. For a period of time, they were right. In 2018, WTI Crude recovered above $60 per barrel and reached the mid-$70s as many oil and gas companies exited bankruptcy with improved balance sheets. The volume of oil and gas company bankruptcies declined dramatically from 2016 to 2018. But it didn’t last. Continue reading Next Wave of Oil and Gas Bankruptcies