In a vast undeveloped wetland in northern Hong Kong, one of America’s most dangerous debt investors overcame China’s biggest restructuring last week by taking over the Castle.
Oaktree Capital, one of the oldest experts in pursuing unpaid debt companies, seized a huge plot of land that symbolizes the madness of the ambitious ambitions of Chinese developer Evergrande before it collapsed under its $ 300 billion debt.
For a decade, the developer’s chair had planned to build its own Versailles-style mansion on the site – codenamed Project Castle – but Evergrande was eventually unceremoniously deprived of the asset after failing to pay $ 600 million. borrowed from Oaktree.
Yet while land grabbing stunned other foreign creditors of Evergrande, few – if any – knew that Oaktree had already quietly seized another of the developer’s projects across the border in mainland China.
Headquartered 7,000 miles away in Los Angeles, Oaktree has been discreetly pulling the strings of a sprawling tourist resort near Shanghai for months, designed to look like the Italian city of Venice after Evergrande missed a second $ 400 million loan.
It was just a “routine deal,” Oaktree founder and co-chair Howard Marx told the Financial Times.
“I don’t think it’s bold,” he said. “In order to encourage us to take the loan, the company provided us with a guarantee. And with a lot of cooperation and discussion, we are exercising our security rights. ”
Oaktree will be “missed” if it fails to seize the assets, he added. “Our customers are the ones who have claims to these buildings.”
For many, the bravado involved in carrying out these land confiscations is an example of the attributes that have made Oaktree a powerful $ 161 billion debt hub. While most of Evergrande’s foreign creditors are likely to recover only pennies of the dollar from its 20 billion bonds, Oaktree could bank contingencies of more than $ 200 million if it manages to sell the assets it now controls.
“These are not your average creditors,” said a man close to asset forfeiture. “These guys specialize in lending when they know a company is in default and they know they will take over the asset. It went exactly as they expected. “
But for others, the group’s decision to lend $ 1 billion to a shaky Chinese developer also underscores shrinking investment opportunities – fewer corporate defaults in developed markets overflowing with cheap money from central banks – and a high risk appetite. necessary to pursue them. .
The chief investment officer of another major US investor in troubled debt told FT that his company has a simple rule for China: “We do not lend there.”
But Marx, 75, has a different view: “When everyone else says China can’t invest, it means that competition for Oaktree to invest is declining. We get better opportunities and more of them. ”
After closing the biggest troubled investment instrument of its kind last year – its $ 16 billion opportunity fund – Oaktree has invested in emerging markets around the world, including rescuing Chinese owners of an Italian football club by helping Chilean airline to get out of bankruptcy and maintain the heavily indebted business empire of Indian commodity tycoon.
These diverse global investments are far from the US-focused loans Oaktree specialized in when Marks opened in 1995 with a strategy to invest in “good companies with bad balance sheets.”
In the following decades, Marx consolidated his status as an erudite and ordinary debt specialist by outlining his investment strategies in a hugely popular series of notes by Warren Buffett. At the same time, his business is not escaping battles with insolvent companies or competing creditors.
“Howard Marx has this nice image,” said one rival, “but they do some pretty medieval things.”
Drinking the blood of his enemies
In the earliest days of his career, Marx learned the value of investing where others were afraid to step.
At Citigroup, and later the Trust Company of the West, he was an early buyer of the high-risk “junk bonds” sold by Michael Milken, the man who largely built the market in the 1980s and whose grand collapse culminated in a verdict. in prison for securities fraud in 1990.
In 1995, Marx established Oaktree Capital Management with TCW colleague and former lawyer Bruce Karsch. While Marx became a public figure in the company, Karsh worked behind the scenes and used his legal knowledge to figure out how to take control of companies that had not repaid loans.
Marx recalls: “People would say: are you buying the debt of companies that are bankrupt? You’re crazy!”
And yet, even as the hard-to-invest market has become more crowded, Oaktree has distinguished itself by its non-prisoner approach.
A clash with the $ 481 billion Apollo private equity group over the bankruptcy of the Caesars casino group led Marks to part with its founder, Leon Black, a longtime friend and ally of Milken’s. During Caesar’s difficult final restructuring negotiations, an observer said memorable: “The oak tree is here to drink the blood of Apollo.
Oaktree went public in 2012, but remained on the list for less than a decade, selling to Canadian infrastructure group Brookfield for nearly $ 8 billion in 2019.
Investing in Asia is not new to Oaktree, which first became involved in the region three years after its launch. But it was after the global financial crisis that its eastward expansion began in earnest.
With the shrinking number of companies in difficulty in the United States and Europe, investors like Oaktree are desperately looking for new opportunities.
In 2019, betting on finding opportunities in China and India – which were largely untapped by global credit funds – Marks moved one of Oaktree’s two oldest portfolio managers, Pedro Urquidi, from London to Hong Kong. A year later, the company opened a wholly-owned unit in mainland China, the first foreign investor in troubled debt to do so.
He made headlines in India last year after lending $ 1 billion to a Mauritian investment company controlled by Anil Agarwal, one of the country’s richest people, backing his debt-laden business empire with interests ranging from oil to aluminum.
While Evergrande’s loans are Oaktree’s last troubled debt asset in China, last year it lent to a Luxembourg company that owns shares in Chinese retailer Suning of Italian football club Inter Milan.
The $ 275 million loan helped Suning cover the club’s liquidity needs after the pandemic devastated its finances, but there are strict conditions that allow Oaktree to declare default if, for example, Inter are disqualified from participating in certain competitions.
Battle with Beijing
The seizure of two of Evergrande’s crown jewels at a time when President Xi Jinping has promised to tame China’s thriving real estate market in a bid for “common prosperity” puts Oaktree in a politically difficult position with Beijing.
For the Chinese government, the real estate sector poses financial, social and systemic risks. The decades-long construction loan led to 90 million vacant apartments and a total outstanding debt of $ 5 trillion, a third of China’s gross domestic product.
Oaktree is now caught in a government crackdown on property developers that has limited their ability to borrow and has led to a drop in house prices. It will have to sell Evergrande’s assets in a market where valuations are changing and where Beijing has given priority to homeowners’ financial interests over builders.
If Oaktree sells the facilities, it will recoup its $ 1 billion investment, plus interest at more than 20 percent, according to a person close to the details. This can lead to poor publicity at a time when construction workers, homeowners and retail investors are suffering from the effects of the debt crisis on entrepreneurs.
In the case of the Venice Continental Project, the legal force of foreign investors’ claims on Chinese domestic assets has been unclear in the past.
However, Marx said he was confident that Oaktree’s creditors’ rights would be respected by Beijing. “Things are going as expected,” he said. “We are working with the company and everyone, including everyone in China, says the law will be obeyed.
“I personally believe that China wants to be a member of the global financial community. And I think that desire will give information about his actions, “he said.
“I hope I’m not Poliana. . . but so far there is no evidence to the contrary that we cannot rely on the rule of law. ”
Oaktree controls the development of Evergrande through a cascade of corporate entities that stretches from China and Hong Kong to Singapore and the British Virgin Islands, allowing it to take control of the land without the money changing the owner of mainland China.
So far, she has not faced a challenge from Beijing in taking over the projects. He resumed construction on the site in Venice and began selling apartments.
His actions may even be in line with Xi’s own policy, which forced China’s richest tycoons to redistribute their wealth: in 2017, before the current problems, Evergrande founder and chairman Hui Ka Yang was the country’s richest man .
“You can’t do this without some green light from the Chinese authorities,” said the rival credit manager. “You need air cover to make such a move.”
A person familiar with the matter even described Beijing as “quite pleased with the situation.”
Whether or not Oaktree predominates where other debt investors are afraid to go, its bold invasion of mainland China is in line with its founder’s investment philosophy.
This is a principle that has guided his entire career, Marx said: “Great investments are often made when you are ready to do something that no one else is doing.”
Additional reports from Chan Ho-chem in Hong Kong