Solving Dilemmas of Private Local AMCs Urgent

Another privately-owned local asset management company (hereinafter referred to as "local AMC") is in trouble.

On August 13th, due to a loan contract dispute with a small loan company, Chongqing's private local AMC - Chongqing Fucheng Asset Management Co., Ltd. (hereinafter referred to as "Fucheng Assets") was listed as a defaulter, and Fucheng Assets and its legal representative also received a consumption restriction order.

According to the reporter's statistics, previously, Hubei Tianqian Asset Management Co., Ltd. (hereinafter referred to as "Tianqian Assets"), Guohou Asset Management Co., Ltd. (hereinafter referred to as "Guohou Assets"), Ningxia Shunyi Asset Management Co., Ltd. (hereinafter referred to as "Shunyi Assets"), Shanghai Ruiyin Shengjia Asset Management Co., Ltd. (hereinafter referred to as "Ruiyin Assets") and several other private local AMCs have fallen into difficulties.

"Privately-owned local AMCs, represented by Guohou Assets, usually have a smaller capital base and are limited by this, forming a business characteristic dominated by investment business and quasi-credit business, with a usually low proportion of non-performing asset main business; in the economic downturn in recent years, investment, quasi-credit and other businesses are prone to credit events, and shareholders of private AMCs are usually unable to provide strong capital support, we believe that the overall risk of private AMCs is relatively high." A recent research report released by the Research Institute of Zheshang Securities stated.

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The reporter's statistics found that among the licensed local AMCs, there are 13 private local AMCs, and from the above information, there are already 7 private local AMCs in business difficulties, more than half.

Regarding the reasons for the difficulties faced by several private AMCs, Li Ying, General Manager of the Financial Institution Rating Department of S&P Global Ratings, analyzed in an interview with the reporter that there are mainly three aspects. First, the asset side of non-performing asset management companies is non-performing assets, which have poor liquidity and uncertain realization time; if good liquidity is to be maintained under the condition of poor liquidity on the asset side, and default is to be prevented, strong financing ability is required, and continuous support from commercial banks is needed. Private AMCs without state-owned background find it difficult to maintain stable external financing for many years. Second, the quality of assets of non-performing asset management companies is highly pro-cyclical; in the economic downturn, the difficulty of realizing non-performing assets increases, and the recovery rate decreases; at the same time, the recovery of many non-performing assets depends on real estate assets, and under the current real estate market environment, the preservation and appreciation of real estate assets, as well as the difficulty of realization, are great. Finally, local AMCs are not banking financial institutions, although they are subject to certain regulatory constraints, but in terms of regulatory intensity, they are far less than banking financial institutions, and they are more prone to problems in business direction, risk management, internal control, and corporate governance, leading to operational difficulties.

It is understood that among local AMCs, apart from more than a dozen enterprises controlled by private enterprises and a very few controlled by central enterprises and foreign capital, the vast majority are controlled by local state-owned capital, including local finance, local state-owned enterprises, and local financial holding groups. Due to the strong policy attributes of AMC business, state-owned AMCs have more advantages than private enterprises in terms of business resource acquisition, financial support, financing channels, and financing costs. In the past two years, the trend of local state-owned capital further increasing its holdings in local AMCs has also been quite obvious.

Regarding the current market situation faced by private local AMCs, Li Ying told the reporter that the current financing environment does not support the high-leverage operation of private local AMCs. According to the data adjusted by S&P Global Ratings, the current leverage ratio (total debt/equity) of state-owned mainstream local AMCs is about 4 times. It is difficult for local private AMCs to find a stable financing source to maintain a leverage ratio of about 4 times and ensure no liquidity risk. If operating with low leverage, the business scale is too small, and the capital consumption is very fast, making it difficult to achieve a sustainable non-performing asset disposal business model.

"The policy attribute of the non-performing asset management industry is strengthening, and the pure market attribute is decreasing; in recent years, the large-scale non-performing asset acquisitions of local AMCs have often been state-owned AMCs acquiring asset packages of high-risk local banks under the arrangement of local governments. The first purpose of these businesses is to maintain local financial stability and resolve local financial risks, not pure market businesses. Such businesses can only be carried out by state-owned AMCs, and private local AMCs do not have many business opportunities." Li Ying said.

So, how should private local AMCs get out of the current difficulties? Zhang Luofu, the founder of China's Special Asset Comprehensive Service Platform, Zi Ya Network, believes that increasing capital and expanding shares, and strengthening liquidity management, have a strong supporting role in helping private local AMCs get out of difficulties as soon as possible and better play their disposal functions and efficiency. "Under the background of the downward macroeconomy, private local AMCs need to actively expand domestic and foreign financing channels, while continuously innovating and enriching disposal methods and means, improving fund recovery efficiency, and alleviating the pressure caused by the backlog of non-performing assets; at the same time, they should also be prepared for a protracted war, maintain reasonable liquidity reserves and have good liquidity management capabilities, so as to better resist the impact of market fluctuations.""Due to the lack of stable long-term financing, private local AMCs find it difficult to emulate the business models of state-owned AMCs," Li Ying stated. To break out of the predicament, private local AMCs need to establish unique specialized capabilities in specific areas, such as a personal loan delinquency collection system that is more efficient while effectively controlling the risks of violent debt collection, or the ability to identify potential high-quality assets or asset liquidation capabilities in certain specialized fields.

"Private local AMCs need to leverage their shareholders' background and regional location, and based on the characteristics of the industry, build a 'small but beautiful' specialized team, delve deeply into the sub-tracks, and should not blindly expand on a large scale. They should win with quality, increase profits, form operational advantages and characteristics, and ultimately be able to span cycles," Jin Le Function analyst Liao Hekai told the reporter.