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Non Performing Loan Transactions and Land Use Rights in China. Presented by: Robert J. Allan USA China Law Group US-China Business Law Conference at UCLA Los Angeles, Ca - October 24, 2008. Current Economic and Legal Climate for Investments in China.

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non performing loan transactions and land use rights in china

Non Performing Loan Transactions and Land Use Rights in China

Presented by:

Robert J. Allan

USA China Law Group

US-China Business Law Conference at UCLA

Los Angeles, Ca - October 24, 2008

foreign investment in china overview
Foreign Investment in China Overview

Top destination for foreign direct investment (“FDI”) for sixteen years *

US $52.39 B in FDIto China in the first half of 2008 – a 45.6% increase over the same period in 2007 **

Foreign invested enterprises (“FIEs”) play a major role in China’s economy – 58% of imports and exports *

Top foreign investors: HK first; US sixth *

Top FDI destination: eastern region – 81.9% *

Hot sectors: manufacturing (57.7%) and real estate (11.9%) *

Sources: * The US- China Business Council

** Asia Monitor, September 2008

issues to watch
Issues to Watch

Economic protectionism

Push for “indigenous innovation”

New rules on foreign investment

Enterprise Income Tax Law

Labor Contract Law

Antimonopoly Law

Catalogue Guiding Foreign Investment in Industry

Revised regulations on the management of foreign exchange

what chinese government wants
What Chinese Government Wants

Encouraged Sectors:

Non-performing Loans

Services

Emerging and high-technology

Energy and the environment

Healthcare

what chinese government doesn t want
What Chinese Government Doesn’t Want

Restricted or Banned Sectors:

Real estate

Media and publishing

Manufacturing solely for export

Manufacturing requiring a high usage of resources or energy

an overview of non performing loans in china
An Overview of

Non Performing Loans in China

background of china s non performing loan npl market
Background of China’s Non Performing Loan (“NPL”) Market
  • High ratio of NPLs
  • Source of NPLs – Politically based lending practices of State Owned Enterprises (“SOE”)
  • Disposition of NPLs remains a top priority of the PRC
      • Reform of the banking system
      • WTO accession
      • Privatization of SOEs
      • New banking policies to address the economy’s growth
  • Creation of the Asset Management Corporation (“AMC”)
      • Facilitate acquisition of NPLs from State Owned Banks
      • Facilitate acquisition of NPLs from commercial banks
opportunities and emerging trends
Opportunities and Emerging Trends
  • Big Market
      • Current transactions in the market
      • Upcoming transactions
  • Big Players
  • Big Deals
  • Reasons sales will increase in 2008-2009
  • Impact of global recession-depression
why npl in china
Why NPL in China?
  • Easiest and most effective way to acquire interests in land use rights and businesses in China
  • Significant discounts
  • High intrinsic values
  • Simplified acquisition and approval processes
  • Foreign exchange benefits
  • RMB undervalued by 30-40% *

Source: * Asia Monitor, September 2008

challenges facing foreign npl investors in china
Challenges Facing Foreign NPL Investors in China
  • Local knowledge essential to successful transactions
  • Motivation and political agenda of the sellers
  • Limited time span to undertake due diligence
  • Numerous political and regulatory hurdles
  • Complicated governmental approval processes
  • Limited exit strategies
  • No leverage
key investment criteria
Key Investment Criteria
  • Well developed primary cities
  • Significant unambiguous collateral and assets
  • Clear understanding of investment target
  • Ability to resolve critical issues:

-Legal

-Regulatory

-Financial

-Operational

  • Comfortable buffer on pricing and vigorous risk management mechanisms
key investment criteria1
Key Investment Criteria
  • Extensive and comprehensive pre-tender due diligence
  • Realization or enhancement of the intrinsic values of the assets
  • Target annual IRR of 25%
  • Liquidity within 2 years
investment strategy prioritization of npl portfolio assets
Investment StrategyPrioritization of NPL Portfolio Assets

Collection

Medium

Assetranking

Asset

categorization

Difficulty

assessment

  • Analysis
  • Litigious or non-litigious
  • Assignment of staffing for collection
  • Rank debt accounts for collection
  • Collection on high value accounts
  • Assignment of staffing for collection
  • Categorize accounts
  • Assign specialist according to the categorization
  • Assessment
  • Allocation of specialist

Selection of most efficient collection medium

Prompt action on high value accounts

Specialization to ensure collection

Ensure collection even adverse cases

investment process
Investment Process

Deal sourcing and screening

Due diligence

Analysis

Pricing and deal structure

Recovery process

Post-acquisition value creation

recovery process
Recovery Process

Recovery

Projection

Feasibility

Analysis

Examination of

Creditor’s Right

Recovery

Analysis

Cost

Estimation

Asset

Investigation

Legal

Opinion

Independent

Agents’

Opinions

Solution

Implementation

Creating

Preliminary

Recovery

Solutions

factors affecting direct investment in chinese real property market
Factors Affecting Direct Investment in Chinese Real Property Market
  • Chinese concept of “land ownership”
      • Land use rights
  • New restrictions concerning foreign investment in real estate market
      • New Property Law
      • Opinions Concerning Regulating the Access to and Administration of Foreign Investment in Real Estate Markets
      • Notice Concerning Regulating the Purchase of Residential Property by Foreign Institutions and Foreign Individuals
      • Circular 30 – Circular of General Affairs Department of SAFE on the Distribution of the List of the First Group of Foreign Invested Real Estate Projects which has Filed with the Ministry of Commerce
acquiring land use rights through npls
Acquiring Land Use Rights Through NPLs
  • Collateral for loans primarily consist of land use rights
  • These creditors rights can be sold to the ultimate end user
  • Most efficient and effective approach to pair ultimate end user with local developer
slide23

Case Study

  • Introduction
    • Sold by AMC, originally acquired from Chinese commercial bank in 2007 through a public sealed bid offering
    • 33 borrowers a majority of which are located in Beijing
    • OPB RMB 1,098 million; total legal claim RMB 1,410 million as of 30 September 2007
slide24

Case Study

  • Due Diligence – February 2008
    • A desktop financial and legal review of 25 borrowers
      • represents 76% of the total accounts in number
      • represents 97% of the total OPB
    • Done by big four accounting firm and Alpha & Leader Law Firm
    • Scope of due diligence
      • Loan information and current status of borrower
      • Current status of collateral
      • Litigation & legal flaws
      • Risk & risk management
      • Recovery strategy and implementation
        • Recovery ability analysis
        • Valuation methods
        • Estimated recovery amount
        • Estimated recovery time

-Possible disposal methods

-Recovery resources

slide25

Case Study

  • Post-acquisition Value Creation
    • Examination of creditors rights and asset investigation
    • Recovery projection, recovery analysis, cost estimation, independent agent’s opinions
    • Creating preliminary recovery solutions
    • Feasibility analyses and legal opinions
    • Solution implementation

Estimated total recovery amount:

-RMB 633,536,244.13

slide26

Case Study Acquisition Time Line

Time Line

Procedure

Dec. 2007

COAMC purchased the portfolio from Bank

COAMC issued the transaction timetable

Late Dec. 2007

Approach major foreign investors

Early Jan. 2008

Reach initial MOU among co-investors

Mid. Jan. 2008

Mid. Jan. 2008-

Late Jan. 2008

Portfolio DD

Feb. 2008

Roll-up

Late Feb. 2008

Investors going through internal approval process

3rd Mar. 2008

Go through tender process

Apr. 2008

Obtain approvals from National Development and Reform Commission

May 2008

Obtain approvals from State Administration of Foreign Exchange

Transaction Closed

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