News Archive : Japan Real Estate

Thursday, November 17, 2005

Recovery in Asia shrinks market for soured loans

International Herald Tribune <>

Recovery in Asia shrinks market for soured loans
By Patricia Cheng Bloomberg News

J.P. Morgan Chase, Morgan Stanley and other investors are facing diminishing returns in the $1 trillion Asian market for bad loans, as sales of distressed debt decline and hedge funds provide new competition.

Japan, South Korea and Thailand, swamped with companies unable to pay debts after the 1997 Asian financial crisis, now have fewer bad loans to sell. The overall pool of bad debt in the region has fallen to less than the $1.2 trillion tally in Japan in 2002, according to estimates compiled by Ernst & Young.

Returns on Asian distressed debt fell to 6.3 percent at the end of October from 31 percent in 2002, according to an index run by the research firm Eurekahedge.

In Japan, Mizuho Financial Group and other banks have cut their bad-loan ratios by half, reducing supply, and economic recovery is helping to improve the quality of their loan assets.

"You've got lots of capital chasing few opportunities," said Christopher Nicholas, head of J.P. Morgan's so-called special situation group in Asia. "The returns have collapsed."

Investors are responding by looking for more risk, buying unsecured debt or equity in companies to improve returns. J.P. Morgan changed the name of its distressed unit to a special situation group to reflect the shift in strategy.

Morgan Stanley has turned its focus to real estate, said Sonny Kalsi, head of its property unit in Asia. His staff invest in both property and distressed assets.

"We also look at some mezzanine and direct investment opportunities and restructuring companies through new capital injection," Kalsi said.

Prices in Asia's secondary market for bad loans are also rising. Creditor claims on China Aviation Oil (Singapore), a jet-fuel trader that collapsed after losing $550 million from derivatives trading, were traded at 50 cents on the dollar by the middle of this year.

That was an increase from 15 cents in 2004, said Victor Wee, head of Southeast Asia & Asian credit hedge-fund fixed-income sales at UBS in Singapore.

Investors, who used to get an internal rate of return of more than 20 percent, now have to accept returns of as low as 10 percent, said Ryo Kuwasaki, a director of real estate advisory activity at Ernst & Young in Tokyo.

Increased competition for high-yield assets is also driving up prices. Sixty hedge funds set up Asia businesses in the first nine months of this year, up from 15 a year earlier, according to Eurekahedge.

Accelerating economic growth is making banks less eager to sell loans at a discount to investors. The World Bank this month raised its 2005 economic growth forecast for East Asia to 6.2 percent from 6 percent, citing faster-than-expected expansion in China. The International Monetary Fund in September raised its growth forecasts for Japan and the rest of Asia.

"Distressed assets will reduce as the economy improves," said Grant Kelley, head for Asia at Colony Capital, a U.S. private-equity firm. "It's a self-liquidating business."

Japan's seven largest banking groups cut bad loans by 45 percent to a combined \7.7 trillion, or $64.8 billion, in the year that ended March 31 as the economy started to recover, after suffering four recessions since 1991.

Looking ahead, China and India may present the most investment opportunities as the they overhaul their banks.