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Warburg Pincus, Goldman Take Stakes in Huarong

NEW YORK (The Deal) -- Leading Chinese bad-debt investor China Huarong Asset Management Co. announced Thursday that it will sell stakes in itself to eight foreign and domestic investors, ahead of a projected initial public offering in Hong Kong.

The move comes as opportunities for bad-debt acquisitions are seen to be opening up, as Chinese banks' non-performing loan portfolios burgeon and the economy struggles with the consequences of years of massive lending by both official lenders and the shadow banking system.

The eight, including New York private equity firm Warburg Pincus LLC and Goldman, Sachs & Co., as well as Malaysian sovereign wealth fund Khazanah Nasional Bhd., will invest a total of 14.54 billion renminbi ($2.36 billion) for a 20.98% stake in Huarong. The share each company will take has yet to be released.

The domestic buyers, China International Capital Corp., China Life Insurance Group Co., CITIC Securities International, Cofco Corp. and Fosun International Ltd. include both state and private sector investors. The deal has been approved by the State Council and other supervision authorities, according to the Huarong statement, which was reported by the official Chinese media. Huarong is currently a state-owned enterprise, 98.06% owned by the Ministry of Finance.

Earlier this year, Reuters reported that about 20 investors, including Kohlberg Kravis Roberts & Co. LP and Blackstone Group LP, were expected to submit first round offers for the pre-IPO investment.

Chinese banks' nonperforming loans have climbed for almost three years, the longest run since 2004, according to Bloomberg, which said Huarong reported a profit of Rmb11.8 billion for the first half of this year before provisions.

Huarong Chairman Lai Xiaomin told a Beijing press briefing on Thursday that the IPO is expected before the end of 2015.

Yet even as Huarong prepared to go public, its listed peer China Cinda Asset Management Co. suffered a share selloff in Hong Kong, after reporting disappointing first-half profit. The shares fell 7.1% to HK$3.92, as Beijing-based Cinda reported net profit of Rmb5.3 billion, below analysts' expectations. Cinda priced its IPO in December last year at HK$3.58, and has traded well above that level for most of this year - despite coming within a single cent of the IPO price at its low point in May.

Cinda and Huarong were among four bad loan companies set up by the government in 1999 to soak up problem debt on the books of China's financial institutions. They have reportedly bought and sold about Rmb3 trillion in the years since then.

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