Troubled Loan Trail Leads to China -- Do Not Try This At Home

Today's Wall Street Journal has an interesting article on foreigners purchasing Chinese bad debt. Entitled "Troubled Loan Trail Leads to China,"  The article talks about how buyers of nonperforming loans (NPL) have lately been focusing on China.  The article describes these purchases as high-risk, high-return.  You think? 

This article comes on the heels of an Ernst & Young report, out today, that accesses the global market in nonperforming loans and concludes China is today's hot market, based mostly on its just now opening up to foreigners and on its having done little with its bad loans for years: 

Even China is poised to allow foreign investor�s access to its banking industry. Despite a slow start, the NPL disposition process has accelerated in the last 12 months. However, China�s NPL problems appear far from over considering China�s large numbers of legacy (pre-1997) loans still to resolve and an estimated total NPL exposure of US$900 billion � substantially more than any other region in the report.

The WSJ article highlights Chicago based DAC Management and its founder and president, Phil Groves, and their extensive experience in buying Chinese distressed assets:

Phil Groves, founder and president of DAC Management, an investment firm with offices in Beijing, Hong Kong and Chicago, has been investing in troubled loans and distressed real estate in China during the past five years. He recently bought a Ramada Inn in the northern city of Dalian after the bank foreclosed on the property.

A big challenge with these investments can be confirming who holds clear title to the property, Mr. Groves says. Also, the Chinese government may have part ownership in a company and a "certain loan may have importance to the government," he adds. "I am still learning new things every day and I am five years into it."

We here at China Law Blog have known and been impressed by Mr. Groves and his China business for quite some time.  In fact, just a few months ago, Steve flew down to Dalian and stayed at the Dalian Ramada, mentioned in the article (which really is quite a nice hotel), to meet with Mr. Groves. 

Investing in distressed Chinese assets is indeed a risky business, but those who know what they are doing in this business and in China do seem to be securing good returns.