IFC has been requested by China Huarong Asset Management Corporation (Huarong AMC) to support its upcoming international auction of a portfolio of non-performing loans (NPLs). The pilot auction of up to RMB 16.5 billion (US$2 billion) in outstanding claims of Huarong''s portfolio is being planned for later this year (TBA). The auction portfolio consists of 3,200 loans to 301 borrowers from diversified sectors across China.

The project company, Huarong AMC, was established in October 1999 with registered capital of RMB 10 billion (US$1.2 billion), infused by the Ministry of Finance. As one of four AMCs -- each corresponding to one of the "Big Four" state-owned commercial banks -- created by the government of China (GOC), Huarong AMC''s major objective is to manage and dispose NPLs acquired from the Industrial and Commercial Bank of China. Huarong is wholly state-owned.

IFC would provide support to Huarong''s auction by making available a financing package to the winning bidder(s). Such winning bidder(s), whether privately-held or publicly-traded, must meet IFC conditions. The terms of IFC''s financing would be circulated to all pre-qualified bidders. IFC will not participate in the bidding process, nor will it align itself with any bidder until the auction results are announced. GOC has expressed support for IFC''s assistance in the auction.

IFC''s financing packages of up to US$50 million (no more than 40% of total project cost) would be largely in the form of senior debt of up to US$40 million, with a smaller common equity interest of up to US$10 million, in an entity that would be formed with the winning bidder to purchase the NPL portfolio from Huarong.

50.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee	15.0
Loan	32.0
Equity	3.0

* These investment figures are indicative

Huarong AMC is headquartered and has 30 branches across China.

The winning bidder will be required to have policies, procedures and organizational arrangements in place to ensure that environmental risks are identified, evaluated and managed as appropriate. An appropriate level of environmental due diligence must be performed on all NPLs at both pre-bid and post-bid stages, and environmental issues must be addressed in the winning bidder’s asset management and disposition plan. The winning bidder would also have to provide IFC with periodic updates on any environmental issues arising. These environmental requirements would be reflected in the terms and conditions circulated to potential bidders. Prior to entering into a final agreement, IFC would need to satisfy itself that the winning bidder has given due consideration to environmental issues, agrees to IFC’s requirements and has the capacity to implement them. As no new financing will be provided to the borrowers, the project will not directly lead to potential environmental impacts. However, the nature of Huarong’s NPL portfolio means that the sale could include assets associated with several environmental issues that may impact on the financial performance of the project. Collateral value may be impaired by, for example, contaminated real estate, factories that lack the necessary environmental operating permits, or industrial equipment utilizing obsolete pollution control technology. The investor would have the right to return NPLs to Huarong for zero consideration at any time within the first year, for any reason. This put option should enable the investor to relieve itself of any NPLs found to have severe environmental problems/liabilities. However, as the viability of the project would largely depend on the investor’s ability to extract value from collateral, the preference should be to mitigate any environmental problems, where feasible.

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