IFCÆs Avenue to Asian bank distressed plays

The private-sector arm of the World Bank seeds another fund to acquire and resolve Asian banksÆ distressed assets.
The International Finance Corporation, the private-sector arm of the World Bank Group, will invest $50 million in the Avenue Asia Special Situations Fund IV, which is dedicated to the disposal or restructuring of non-performing assets. It will do so by focusing on individual assets and asset pools.

New York-based Avenue Capital Group, founded by Mark Lasry and Sonia Gardner, manages $12 billion of assets and has eight offices throughout Asia.

The fund will invest mainly in China and India, but may also take positions in other markets such as Indonesia, the Philippines and Thailand.

The IFC has supported a variety of efforts to work out distressed assets in emerging markets. In 2002, it supported ChinaÆs first NPL sale, Huarong I, by investing $35 million in both equity and debt tranches. In 2004, it invested $40 million in Avenue Asia III, plus $17.3 million in SI Colony China. Earlier this year it invested $35 million in a joint venture with Rongde Asset Management Company.

ôIFCÆs continued support of Avenue Asia as a top-tier dedicated distressed manager has been based on its track record, on-ground presence, and proactive and value-added approach to distressed asset resolution,ö says Liu Dong, deputy country manager for China and principal investment officer at the IFC.

The Avenue Asia fund is designed to improve banksÆ balance sheets by providing another channel to dispose of their NPLs, and thus relieve pressure on capital adequacy. It will invest in companies that are in liquidation, reorganisation or bankruptcy, as well as those that are undervalued due to poor economic conditions or extraordinary events. It will especially focus on industries in turmoil.

The fund will also use financial structuring techniques to move over-leveraged companies toward sound balance sheets as well as provide them with better access to international investors. This in turn, says the IFC, should help companies lower their funding costs, extend their debt maturities, or both.

Such steps could include stretching out maturities or introducing step-up coupons to ensure that viable companies can survive. The specific engineering will depend on cash flows and creditorsÆ degree of leverage.

Liu explains the IFC is both investing in bad asset pools as well as trying to help banks improve their credit culture. He cites IFCÆs ability to exercise its co-investment rights and participate directly in the equity tranche of an underlying distressed investment. ôIFC will be able to play a more active role in the workout process,ö he says.

The IFC justifies its role by noting it is not just buying distressed assets but resolving them. ôThere are very few distressed players, including Avenue, with a significant presence and able to productively undertake resolution of assets,ö Liu says. He argues that AvenueÆs business model gives fund managers an incentive to actively help companies navigate NPL workouts.
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