Intelli-bytes Episode: Opportunity Ever-Grand

In response to LPs’ growing requests for sharing our virtual research meetings, we have launched Intelli-bytes!  With Intelli-bytes, we bring to you video-recordings of our interactive dialogues with managers of opportunities of interest. Our live conversations with managers are not scripted but curated from a preliminary research perspective to help our sophisticated LP audience learn about niche investment opportunities, strategies, relevant manager skills/experiences and personalities, just as they would if they were interviewing the managers themselves. These conversations are neither meant to be product pitches nor staged to allow a manager make canned presentations that they could perhaps on their own, behind a camera or in podcasts behind the scene.

Intelli-bytes brings you raw, uncut, recordings of just how it happened- with our uhms, ahs, laughs, gaffes, interjections, objections, disagreements, distractions and more!

This is as real and personal as it could get for you without you having to attend yet another zoom call or webinar or scan a dense pitchbook or even take a manager meeting when we (ever) get back to old days.

So, transport yourself into the scene, jot down takeaways (not notes!), make inferences, get a feel for the manager, but don’t draw conclusions just yet till you have vetted it yourself or engaged someone like us to do the due diligence on your behalf!

Intelli-bytesfirst conversation is with Ben Fanger of Shorevest, China, probably one of the earliest investors in China distressed debt who set up shop on the ground in China 15+ years ago and has transacted ~ $ 2 billion in NPLs and special situation loans since then.

Synopsis: Opportunity Ever-Grand

The chapter on Evergrande’s (China’s largest property developer) meltdown, in China’s new playbook of “stability over growth at all costs”, is still being written as the situation unfolds each day. While all eyes remain peeled and ears perked for the climax, China bulls are questioning and re-evaluating their pursuit of growth in China. In the mix, are some opportunistic stress/distress debt managers, who are looking to profit from buying deeply discounted offshore bonds of property developers while others are seeking opportunity in impacted unsecured onshore debt. But embedded in this evolving situation is close to $ 8 trillion of bank loans tied to the real estate sector (Source: Moody’s Analytics) in the form of mortgages and loans extended to property developers who are rapidly succumbing to China’s three red-lines on leverage after having taken on massive debt-both loans and bonds-aggregating ~$5 trillion (Source: Nomura).

With a 30-35% decline in property prices thus far (Source: WSJ) , China’s banks are likely to be compelled to extend loans, which when outstanding for more than 90 days, become nonperforming loans irrespective of their low loan to value ratios of 60% and under. This would only add to the older pile of NPLs (estimated up to $ 4 trillion: Source PwC) that China accumulated in the aftermath of the GFC through its unbridled credit binge/fiscal stimulus. 

If the massive $0.5 trillion of NPL disposals in 2020 alone (Source: CBIRC) is any indication, the policy push to delever by recognizing and disposing of ballooning NPLs through its bad-banks (asset management companies like Huarong, Cinda, etc.) is likely to gain momentum with many businesses still hurting from the pandemic-induced slowdown, piling on the heap. 

This potentially affords a gargantuan (ever-grand) opportunity for those positioned on the ground with local teams, networks, infrastructure and above-all, know-how and cultural familiarity/language skills to strategically acquire, risk-manage and dispose of NPLs, targeting mid to high-teen IRRs at the deal level.

Alongside NPLs, wealth destruction in the real estate sector combined with all-round tightening regulation could potentially constrain economic growth hurting many small companies. A clampdown on the ~$ 3 trillion shadow banking sector (P2P loans, entrusted loans, Wealth Management Products etc.) leaves many middle-market companies little choice but to turn to alternative credit providers who could potentially command both mid to high teen IRRs and 1st lien collaterals 2x + the loan value.

In a nutshell, while many investors are tempted to buy unsecured offshore debt on the cheap assuming “contractually” subordinate position to first lien onshore debt, an opportunity, ever-grand in both size and complexity, in NPLs and special situations lending (both senior in the capital stack) is probably worthy of further due diligence.

To understand this ever-grand opportunity, its risks, rewards, execution pitfalls and more, listen in on our recorded one-on-one conversation with Ben Fanger of Shorevest.

LPs are welcome to reach out to us at info@emaltsauditor.com with questions, comments, or requests for more information/due diligence.

Take a listen to Opportunity Ever-Grand and stay tuned.

Yours truly,

Kamal Suppal, CFA

Chief Investment Auditor

October15, 2021

The above content including the recording of the video-call is for information purposes only and should not be used as a basis to make investment decisions. This content is intended for sophisticated audiences as in institutional investors or family offices to help qualify an opportunity for further due diligence. Any theme or idea discussed above is not an offer to buy or sell any investment. All opinions expressed in the video-recording are the managers’ and not of Emerging Markets Alternatives