CITIC Capital targets China distress

Yichen Zhang (pictured), CITIC Capital’s CEO, outlined the plan at the World Economic Forum in Davos. A source familiar with the situation told AVCJ that discussions are still preliminary, adding that the firm is not yet ready to set a target for the new vehicle.

Separately, CITIC Capital is currently seeking $2 billion for its latest US dollar-denominated private equity fund and Zhang indicated that a final close would come in the first half of 2019. A first close of $1.3 billion was announced last September, 18 months after fundraising was completed for the previous vehicle with $1.57 billion in commitments.

The firm already has a special situations group that focuses on distressed opportunities arising from economic fluctuation or market dysfunction. It invests in non-performing loans (NPLs), corporate account receivables, defaulted debt instruments, and securitized non-performing assets. Turnaround and restructuring deals are also considered.

However, CITIC Capital has assembled a new team of professionals to pursue the distressed real estate strategy. It is not the only GP making moves in this area. Last month, Warburg Pincus announced a joint venture with local specialist Hande Group to pursue special situations investments in real estate projects. The JV has initial capital of $1 billion and is looking to reach $5 billion within three years.

Real estate features prominently in most stressed and distressed situations in China – whether the investment opportunity is providing direct support to developers that have run out of money or acquiring portfolios of NPLs for which property assets serve as collateral.

The country’s mounting economic challenges are expected to create new openings for special situations investors, although renewed interest in NPLs specifically became apparent 2-3 years ago. While some industry participants were bullish, others questioned the government’s willingness to force banks to take action, the availability of large-cap deal flow, and the impact of rising competition on pricing.

A PwC report published in November 2018 claimed there had been “a remarkable uptick in sales activity over the last 18 months, with over 20 portfolios sold to foreign investors – including 12 so far in 2018.” It estimated that foreign banks and funds – including Oaktree Capital, Lone Star, Goldman Sachs, PAG, Bain Capital Credit (BCC), CarVal, The Blackstone Group, and LVF Capital – had invested $1.5 billion during the period.

For example, BCC’s breakthrough came in May 2017 with an agreement to buy a portfolio of loans from China Huarong Asset Management with an outstanding principal balance (OPB) of $200 million. It comprised loans tied to commercial, retail, hotel and industrial real estate assets. The firm completed two more deals in 2018.

China’s commercial banks had nearly RMB2 trillion ($282 billion) in NPLs on their balance sheets as of June 2018. There were also a further $493 billion in “special mention” loans that were showing signs of stress and $620 billion in distressed debt held by the asset management corporations, which were established by the government to resolve or sell off NPLs. The total of $1.4 trillion compares to $1.1 trillion in December 2016, PwC noted.

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• Topics
• Greater China
• Restructuring
• Credit/Special Situations
• Fundraising
• Real estate
• China
• CITIC Capital
• Distress