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Oaktree: with an eye on the potential of bad assets

HOWARD Marks, founder of US$100 billion fund manager Oaktree, suggests China to take actions on developing bankruptcy system in order to deal with the country’s extending credits and following non-performing loans (NPLs).

The veteran investor who had built his legendary status on investing in distressed debt – or buying the debt of over-leveraged companies, made the suggestion above at a media conference held last week in Shanghai, featuring the built-up stage of a credit circle the world is facing.

At the moment, Marks said there was limited distress asset in the US market due to fundamental economic pick-up, but there are somewhat more in Europe, primarily because those banks have been selling portfolios of NPLs in order to polish their balance sheets and comply with regulations.

In respond to Shanghai Daily’s request on his advice on investing distressed debts in China, Marks said that there are many to do before one take actions.

“The two questions are if there is distressed debt for sale, can it be bought at attractive prices,” Marks said. “And the other question is, as an owner of distressed debt, which is basically translated to debt where the interest and principle will not be paid, what are your rights?”

Marks mentioned a highly developed bankruptcy system which protects the rights of creditors who are not paid in US, and implied that it takes time to see outcomes to be in China in developing such system.

The world’s second largest economy has been struggling with mounting soured debts amid industrial transmission and extended credits to contribute to growth.

The bad loan of China’s banks estimated at around 1.4 trillion yuan (US$207 billion) at the end of the first half this year, posting its highest level in 11 years, according to data released by National Statistics Bureau.

To write off bad loans on their books, banks generally have to go through asset-management companies (AMCs), whose geographic reach has been expanded to provincial governments under the new rules by banking regulator to dispose bad loans in October.

Being a strategic investor of China Cinda Asset Management Co, one of the four biggest state-backed AMCs, Oaktree said the firm has been participated in cooperation talks over Cinda’s distressed debt’s investment domestically and abroad. But cautious moves are needed when such communication is going on with its Chinese partners, Oaktree said.

Jay Wintrob, Oaktree’s chief executive officer, also mentioned in a previous interview with Bloomberg News earlier this month that Oaktree’s investment activities are now less than its fundraising activities in China.

“We have about a little less than 5 percent of our clients' assets under management are invested in the region, with a lot of opportunity leading forward,” Wintrob said.

Showing presence since 1998 and holding 28 employees in Beijing, Shanghai and Hong Kong, Oaktree is one of the six managers in the first batch of the official certified offshore investment program Qualified Domestic Limited Partnership (QDLP), and had raised one billion yuan to invest in to Oaktree’s fund overseas.

Marks said Oaktree will raise funds again through the program when the opportunity arrives.

“This is not gambling. This is serious wealth building,” Marks said. “And you should think of wealth building as patient and gradual and hopefully dependable to lead to long term financial success.”


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