Alibaba Group Holding Ltd (BABA) Sells Bad Debt

Recently, China Cinda Asset Management Co. Ltd announced that it was teaming up with Alibaba Group Holding Ltd (NYSE:BABA) to auction 4 billion yuan ($645 million) of bad loans. These non-performing assets will be sold on Alibaba’s consumer-to-consumer (C2C) Taobao marketplace.

China Cinda is one of four asset management companies in China, licensed to take over non-performing loans from large state-owned banks. The company specializes in distressed asset management and offers tailored financial services. According to Bloomberg, the asset management company generated record level of profits last year, rounding up to an overall rise of 32%. Presently, China Cinda stands at an impressive market value of $23 billion.

A non-performing loan is dubbed “bad” because it is either in default, or close to a default. According to Bloomberg, China’s non-performing assets have been on the rise in the recent past. In fact, in the first three months ended March 31 this year, bad loans shot up by a whopping 140 billion yuan to 982.5 billion yuan. This stands to be the largest rise China has seen in more than six years, and rounds up to the size of Vietnam’s economy, reported Bloomberg. These non-performing assets are likely to extract considerable appeal, as investors in bad loans are awarded top priority if and when a company goes bust. This means that a bankrupt company would pay back its creditors even before its shareholders.

An inside source told Market Watch that the asset management company was slapped with a pile of bad loans following the economic downturn. Nearly three years later, China Cinda now intends to dispose off these non-performing assets. Market Watch quoted the source as saying that, “The economic downturn was a double edged sword for Cinda. The company bought more non-performing assets at low prices from banks, but those assets are hard to sell.” Through its partnership with Alibaba, the asset management is looking for an opportunity to sell off these toxic assets. Additionally, the source unveiled that in 2016, China Cinda plans to unlock the remaining chunk of bad loans for sale.

Taobao allows sellers to post goods on its online platform, either for direct sale or an auction. In the past, more than 34 companies have used Taobao’s auctioning platform for quick disposal of assets, revealed Market Watch. These sellers have used the platform to sell-off properties, shares, and intellectual property rights.

Analyst at Standard &Poor, Liao Qiang told Bloomberg that China Cinda has found an ideal partner in Alibaba to unload non-performing assets at reasonable prices. Mr. Qiang specified, “Alibaba’s online loan auction platform broadens the investor base for bad loans and therefore will lead to better price discovery for distressed assets.”

Bloomberg quoted Simon Gleave, partner at KPMG’s Asia Pacific financial services in China, “The volume of bad loans in the economy has reached the point where the banks need to be innovative. A lot of expertise resides with the asset management companies and banks have to decide what’s the best way to maximize value.”

Indeed, banks such as Standard Chartered Plc and UBS Group AG have previously bought stakes in Cinda, reported Bloomberg.

Partner at PricewaterhouseCoopers, Victor Jong, disclosed to Bloomberg that the supply of non-performing assets has received considerable acceleration in the past. Most of the increase has been contributed by banks. Rising supply has ultimately inflicted downward pressure on prices. The most obvious winners to surface from this are asset management companies. Indeed, China Cinda saw its net income rising to record levels last year. The stock has gained approximately 30% of market value, year-to-date.

Meanwhile, Alibaba continues to dominate China’s C2C marketplace, despite recent dents to its credibility in relation to the sale of fake goods. However, Mr. Gleave is doubtful that Taobao is an ideal platform for auctioning bad loans. Bloomberg quoted Mr. Gleeve as saying, “Alibaba’s auction site is just a market place. Whether that’s a good way to trade bad debts is still to be seen.”

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