Cashmere wool trading slumps as much as 98.3% yoy www.zgm.mn

In the first three months of the year, the Mongolian Agricultural Commodity Exchange (MCE) traded 860 kg of cashmere wool at an average price of MNT 91,000. In other words, the total trading volume decreased by 98.3 percent compared to the same period of the previous year. In March 2019, the MCE traded cashmere worth approximately MNT 4.6 billion, with an average weighted price of MNT 134,000. According to the Mongolian Wool and Cashmere Association (MWCA), the spread of COVID-19 has led to a delay in demand this year and the price of cashmere has dropped to MNT 60,000. MCE also informed that there are difficulties in preparing cashmere. However, the MCE emphasized that non-cashmere trade is normal as there are no changes in the transportation of commodities. Since March, the Agricultural Exchange has traded a total commodities worth MNT 6.4 billion. This is a decrease of MNT 4.3 billion or 40 percent compared to the same period of the previous year.

TRQ forms joint comittee with Rio Tinto to discuss strategic issues of OT www.zgm.mn

Turquoise Hill Resources (TRQ) has formed a Joint Steering Committee and Joint Working Group with Rio Tinto as a mechanism to facilitate negotiations related to strategic matters amongst stakeholders, the company said on Monday. TRQ has access to and participates in, reviews or oversees key matters related to Oyu Tolgoi, including interactions with the Government of Mongolia related to the Parliamentary Working Group. As it said in a report, the company is actively seeking to identify short and long-term funding options that meet the company’s significant capital requirements to complete the Oyu Tolgoi (OT) Underground development. In addition, OT underground mine development costs are rising and the initial mining date has been delayed while extra funding is required for the Tavan Tolgoi power plant project. According to the report, Turquoise Hill has USD 2.2 billion of available liquidity but the required financing is two times more than that or USD 4.5 billion. Analyst at Seeking Alpha predicts that Rio Tinto may use the opportunity to increase its stake in TRQ. The Board, led by the independent directors and supported by external advisors, thoroughly reviewed both proposals and recommended that shareholders vote against the first proposal and withhold their vote on the second proposal for the reasons outlined in the company’s Management Proxy Circular, filed with securities regulators on March 20, 2020.

Small Mongolian banks record huge losses www.news.mn

The Research Centre for Economic Policy and Competitiveness has issued reviews conducted on banks operating in Mongolia. There currently are 13 commercial banks in the country. According to the Central Bank of Mongolia, the most influential banks are the ‘big seven’ namely; Khan Bank, Golomt Bank, Khas Bank, Ulaanbaatar Bank, the State Bank, and the Trade and Development Bank. These banks dominate 90 percent of the Mongolian banking system.

Welcome to the $1.5 Trillion Minefield of Defaulted Chinese Debt www.bloomberg.com

It’s tough to find a bigger bull on delinquent Chinese debt than Benjamin Fanger. The Mandarin-speaking founder of ShoreVest Partners, a Guangzhou-based asset manager, built his firm around the idea that there’s money to be made from the nation’s growing pile of distressed credit. He says the opportunity is larger now than at any time in the 15 years since he started analyzing China’s nonperforming loans, or NPLs. He predicts it will only get bigger.

Fanger also says the $1.5 trillion-plus market is full of pitfalls. “If you don’t have experience, it can be very risky,” says the 43-year-old University of Chicago Booth School of Business alum, whose team has purchased more than 15,000 Chinese NPLs since 2004.

Distressed Chinese debt is attracting increased global attention, with defaults soaring even before the coronavirus pandemic and with President Xi Jinping’s government peeling back restrictions on international investors. “In an era that could prove to be another global economic crisis, Chinese debt is counterintuitively looking more safe,” Fanger says.

Oaktree Capital Group, the credit-investing behemoth led by Howard Marks, in February opened a wholly owned unit in Beijing to buy NPLs. The potential rewards are juicy. Fanger’s team has generated double-digit internal rates of return on all of its NPL portfolios, according to a ShoreVest offering document seen by Bloomberg Markets. By comparison, Bloomberg’s benchmark index for junk bonds in the U.S. yielded about 6% before a virus-induced spike in late March. In Europe, rates on some corporate bonds are negative.

Global money managers desperate for yield have a growing universe of beaten-down Chinese debt to choose from. The country had $1.5 trillion of NPLs and other stressed assets at the end of 2019, according to PricewaterhouseCoopers. And S&P Global Ratings estimates that past-due loans could jump by $800 billion if the coronavirus epidemic turns into a prolonged health emergency.

Even if China’s economy bounces back quickly, delinquencies may continue to rise. The country’s ruling Communist Party, which enabled one of the biggest credit booms in world history over the past decade by providing implicit guarantees for corporate borrowers, is now trying to tap the brakes. Policymakers have made it clear that bailouts are no longer a given; even some state-owned companies are defaulting on their bonds.

But buyer beware. Veterans of distressed investing in the West may find their playbooks of little use in China. So Bloomberg Markets asked Fanger, Marks, and other specialists how to navigate the minefield. Below are some of the key takeaways.

This is one of Fanger’s guiding principles, and it applies to more than just layoffs and idled factories. When considering real estate debt, for instance, he avoids situations that might force people from their homes. “If a developer got into a cash-flow bind and has contractual purchase and sale agreements with families who think they are buying units, when you go to the court to enforce, the court is likely to delay,” he says.

Another tricky area: companies that issued debt to individual savers through asset management products or peer-to-peer lending platforms. “If retail investors invest in mezzanine debt sold through these products and you buy a senior loan, there could be social unrest if retail investors know they are going to be wiped out,” Fanger says. The upshot: Think twice before buying that senior loan. While China’s government has shown an increased willingness in recent years to let its citizens bear the brunt of poor investment choices, authorities are still loath to make decisions that might send angry people out into the streets.

State support matters

One of the biggest challenges of buying Chinese corporate debt is working out the borrower’s ties to the government, says Soo Cheon Lee, chief investment officer at SC Lowy, a credit-focused banking and investment firm. “China is not about the financials, it’s about relationships,” Lee says. “That’s driving a lot of the liquidity available to a company. You really need to understand the local landscape, and it’s difficult for foreign players to understand who has that connection or support from the state.”

Sometimes a Chinese company will appear to be in dire straits, only to come up with the cash for a debt payment at the last minute, Lee says. “For most of the companies in Asia, we know two weeks before whether they have financing or if they are going to restructure,” he says. “I think it’s very unique for China to not be able to predict a default.”

Some firms are not what they appear to be, Lee says. “If you are truly a state-owned enterprise,” he says, “you will continue to get support from the government or state-owned banks. But when we look at companies that claim to be SOEs but aren’t really SOEs, we see they’re having some difficulties.”

Develop local expertise

For CarVal Investors, which oversees about $10 billion in credit and alternative assets, getting comfortable with China meant tapping the local knowledge of Shanghai Wensheng Asset Management, a distressed debt specialist. The two firms have teamed up to purchase two portfolios of NPLs since 2018.

“Today there are domestic investors and servicers that have experience, and that leads to a much better opportunity if you can team with a smart local investor,” says Avery Colcord, a Singapore-based managing director at CarVal who’s spent about two decades in China. He says the firm would like to buy more NPLs but has taken a cautious approach after “aggressive” bidding by some domestic managers pushed up valuations. At Oaktree, Marks says the firm has also been moving slowly as it builds local expertise. “We’re feeling our way and getting used to a new market,” he says.

Sweat the details

One major advantage of having a strong local team is that it’s more likely to notice the little things that can make or break an investment, says Ron Thompson, managing director of Alvarez & Marsal Asia, who leads the firm’s restructuring practice. Property-related deals in particular often require extreme levels of due diligence. “If you have the whole building, it’s easier, but if you have just the third floor, you have to figure out who owns everything else,” Thompson says. “You have the third floor, but the elevator might be controlled by the debtor, or the mafia. Will you be able to access the floor? Who else can buy it?”

Savvy borrowers will frequently structure their debt in ways that give them leverage. “For instance, you take a block of land, divide it into five, and deliberately default on the middle piece first,” Thompson says. “That’s really worth nothing, because there’s no access. And then the debtor will buy it back, gradually aggregate it, and they’ll only pay market value on the last piece.”

Thompson stresses the importance of hiring lawyers who know their way around the domestic court system. While Chinese authorities have pledged to move toward a more efficient and predictable process for dealing with defaults and restructurings, judges in small, poorer provinces are more inclined to help out down-on-their-luck entrepreneurs. “Going more for local insight is critical in China,” Thompson says. “There are things you could miss without it.”

Liquidity is key

Distressed debt managers in China sometimes overestimate the liquidity of a loan’s collateral, says James Dilley, a Hong Kong-based partner at PricewaterhouseCoopers. It’s crucial because selling assets is often the only way for creditors to get repaid quickly.

Many distressed situations involve real estate, which requires understanding local property markets. It might be easier, for example, to find buyers for a building in more developed provinces on China’s eastern seaboard, such as Jiangsu and Zhejiang, than in less populated inland cities. Some investors have seen their returns suffer because property sales took longer than expected, Dilley says, and “getting that right is key.”

Wee and Choong Wilkins are credit market reporters for Bloomberg News in Hong Kong.

15th coronavirus case recorded in Mongolia www.montsame.mn

Ulaanbaatar /MONTSAME/ A Turkish national, who is being quarantined under medical supervision in the National Center for Communicable Diseases (NCCD), has tested positive for coronavirus, bringing the recorded case in Mongolia to 15. 13 of the infected are undergoing treatment in the NCCD as two patients have been fully recovered and moved to home-quarantine.

Construction of 30.5km Darkhan-Tsaidam road begins www.montsame.mn

Ulaanbaatar/MONTSAME/. Construction work for the 5th part of Darkhan-Ulaanbaatar auto road or a 30.5 km auto road between Darkhan city and Tsaidam of Khongor soum commenced on April 4.

ADB: Mongolia’s economic growth to drop to 2.1 percent www.news.mn

Mongolia’s economic growth is expected to decline sharply in 2020 due to the COVID-19 pandemic but rebound in 2021 as the outbreak subsides, according to a report released Friday by the Asian Development Bank (ADB).

Cargo from Europe being allowed entry under close inspection www.montsame.mn

Ulaanbaatar /MONTSAME/. Appropriate measures are being taken for drivers and vehicles transporting cargo and all types of products entering into the territory of Mongolia from Europe and Russia through Altanbulag border checkpoint. The measures include having them under police surveillance, disinfection, and isolation as well as revealing suspected cases.

Project on increasing livestock sector competitiveness to be implemented www.montsame.mn

Ulaanbaatar/MONTSAME/. On April 2, Minister of Finance Ch.Khurelbaatar submitted a bill on ratifying the financial agreement between Mongolia and the International Development Association (IDA) to the Speaker of Parliament G.Zandanshatar.

Rio faces investor rebellion over Oyu Tolgoi www.mining.com

Rio Tinto (ASX, LON, NYSE: RIO) is facing a new setback at its giant copper project in Mongolia with a large investor demanding a shakeup at the Oyu Tolgoi operation over what it claims is “a massive devaluation” of the asset.

US hedge fund Pentwater Capital wants the designation of a new independent director to represent the interests of minority shareholders at Turquoise Hill Resources (TSX, NYSE:TRQ), the Rio-controlled company that operates the mine.

Naples, Florida-based Pentwater also wants other shareholders to be able to nominate three more directors.

“Turquoise Hill’s board and management have failed to effectively oversee Rio Tinto, and intervene in the abuse of control and refusal to make complete and truthful disclosure by Rio Tinto of the Oyu Tolgoi Project,” Pentwater said in the statement.

The fund, which has a 9% interest in Vancouver-based Turquoise Hill, said it had become increasingly worried at the mismanagement of an underground expansion of the mine and the timing of market disclosures.

“The tangled web that has been woven between Rio Tinto and Turquoise Hill has resulted in a lack of corporate governance controls, systemic disregard for the interests of minority shareholders, a sustained period of false and misleading disclosures and irreparable harm to the interests of all Turquoise Hill stakeholders,” Pentwater said.

Mongolian muddles
Investor activism is just the latest in a series of recent headaches for Rio as it builds what would rank as one of the three largest copper mines in the world when operating at full tilt – now expected to be by 2025 at the earliest.

In January 2018, the country’s government served Oyu Tolgoi with a bill for $155 million in back taxes — the mine’s second tax dispute since 2014. The company said at the time the charge related to an audit on taxes imposed and paid by the mine operator between 2013 and 2015.

Shortly after, the mine had to declare force majeure after protests by Chinese coal haulers disrupted deliveries near the border.

The situation prompted Rio’s chief executive Jean-Sebastien Jacques to visit Prime Minister Ukhnaagiin Khurelsuk to discuss how to build “win-win” partnerships. The trip was followed by the company’s announcement that it was opening a new office in the country, focused on exploration and building local relationships.

The issue resurfaced later, when a group of Mongolian legislators recommended a review of the 2009 deal that launched construction of the mine. It also advised revoking a 2015 agreement allowing for an underground expansion.

In December, Mongolia’s parliament unanimously approved a resolution that reconfirms the validity of all the Oyu Tolgoi mine-related agreement, bringing the 18-month review to a close.

Behind schedule and over budget
Rio warned last year that the project located in the South Gobi desert near the border with China would take 16-30 months longer than expected and would cost as much as an additional $1.9 billion to the initial $5.3 billion earmarked.

Last week, Turquoise Hill poured more cold water on the plan, saying that it would need at least another $4.5 billion to finish the project.

Once completed, the expansion is expected to lift Oyu Tolgoi’s production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, targeted for 2025.

The giant deposit, discovered in 2001, is one-third owned by Mongolia’s government and two-thirds held by Turquoise Hill. Rio has a 51% stake in the Canadian miner.