China bank to transform Sh163 billion of bad debt into securities

Agricultural Bank of China Ltd. is planning to offload bad loans by packaging them up as asset-backed securities.

The move has been touted as China’s largest sale so far under a trial program for lenders.

The lender plans to sell securities backed by 10.7 billion yuan (Sh163 billion) of nonperforming loans on the interbank bond market, it said July 22 on the Chinese bond clearing house website.

The sale price will be the equivalent of 29 per cent of the loans’ face value, with the recovery rate on the debt forecast at 41 per cent, the lender’s statement showed, Bloomberg reports.

As corporate leverage soars and economic growth cools, China’s banks face a rising tide of bad loans. Dorris Chen, a credit analyst at Pacific Investment Management Co., said last week that the country’s Ministry of Finance will eventually have to inject capital into the banking system, without saying when. Policy Toolkit The nation’s efforts to get to grips with its credit woes include debt swaps for local governments, proposals for banks to swap loans for equity stakes in companies, and the trial of the NPL-backed securities.

The China Banking Regulatory Commission said on July 15 that the NPL securities program — so far used by lenders including Bank of China Ltd. and China Merchants Bank Co. — will be expanded.

Pimco’s Chen was skeptical that large-scale sales of the securities will take place, citing investors’ likely perceptions of the risks. In the sales so far, banks have been the biggest buyers — raising questions about how effective the deals are in cutting risks within the financial sector. Agricultural Bank’s securities will include a 2.06 billion yuan (Sh31 billion) senior tranche and a 1 billion yuan (Sh1 billion) subordinated tranche, the Beijing-based lender said.

Agricultural Bank of China (ABC) Limited also known as AgBank or Nóngháng, is one of the “Big Four” banks in the People’s Republic of China. It was founded in 1951, and has its headquarters in Dongcheng District, Beijing.

It has branches throughout mainland China, Hong Kong, London, Tokyo, New York, Frankfurt, Sydney, Seoul, and Singapore. The lender has 320 million retail customers, 2.7 million corporate clients, and nearly 24,000 branches. It is China’s third largest lender by assets. ABC went public in mid-2010, fetching the world’s biggest ever initial public offering (IPO) at the time. The feat has since beenovertaken by another Chinese company, Alibaba. As of 2011, the lender ranks 8th among the Top 1,000 World Banks.

In 2015, the bank was ranked 3rd in Forbes’ 13th annual Global 2000 ranking of the biggest, most powerful and most valuable companies in the world.

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