Washington D.C. July 17, 2002
—The International Finance Corporation, the private sector lending arm of the World Bank Group, will support a landmark transaction in China’s financial sector with a US$31.5 million loan to the winning bidder of the first international auction of non-performing loans (NPLs) in the country. According to official sources, the Chinese banking sector has as much as $400 billion in NPLs, amounting to about 40 percent of China’s GDP.
“This auction marks a decisive step forward in China’s commitment to mend its troubled banking sector,” said Mr. Javed Hamid, Director of IFC’s East Asia and Pacific Department. “We are providing comfort to investors with our presence, and by extension, giving much-needed momentum to the development of an NPL market in China.”
“The IFC’s partnership was an essential element in our winning this transaction.” said Mr. G. David Bednar, Executive Director of Morgan Stanley. “This transaction is very significant because it shows people that China is willing to restructure the financial system by selling NPLs to investors,” added Desmond Chum, Vice President of Salomon Smith Barney. “It gives people confidence and opens up the bad loan market in China.”
IFC’s loan will be provided to China One Financial Ltd., an offshore entity created by the consortium that won the bid for an NPL portfolio of RMB10.8 billion ($1.3 billion), representing the major portion of the total auction portfolio of RMB16.5 billion ($2 billion) auctioned by Huarong Asset Management Corporation (Huarong AMC) in November 2001.
The Huarong AMC was established in October 1999 with a registered capital of RMB10 billion ($1.2 billion). As one of four asset management corporations—each corresponding to one of China’s “Big Four” state-owned commercial banks created by the Government of China—Huarong AMC's strategic mandate is to manage and dispose the equivalent of $50 billion in NPLs acquired from the Industrial and Commercial Bank of China.
The winning consortium was led by MSR Capital Ltd., a Morgan Stanley subsidiary, and included Lehman Brothers Opportunity Holdings Inc., Salomon Brothers Holdings Company, Inc., and KTH Investments Ltd., a Chinese company. The winning bid structure leaves 35 percent of the interest to Huarong AMC. The assets will be owned by a joint venture company to be formed by Huarong AMC and China One Financial Ltd., an offshore holding company representing the consortium’s interest.
The availability and terms of IFC’s financing package to the auction’s bidders were circulated in advance to all registered bidders pre-qualified by IFC. IFC did not participate in the bidding process nor did it align itself with any bidder until auction results were announced.
IFC’s mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, and provides technical assistance and advice to governments and businesses. Since its founding in 1956 through the close of the last fiscal year on June 30, 2001, IFC committed more than $31 billion of its own funds and arranged $20 billion in syndications for 2,636 companies in 140 developing countries. IFC’s committed portfolio at the end of FY01 was $14.3 billion.
