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.

Local Peace Corps volunteer evacuated early from Mongolia www.voicenews.com

Mongolia wasted little time in battening down its hatches to the novel coronavirus. It closed its 2,880-mile border with China on Jan. 27. It closed its schools the same day. It didn't take long for all major events and gatherings in the country to be canceled through February, including Tsagaan Sar, the lunar new year.

"Mongolia has been in a government shutdown since January," said Tony Mercatante, a 2015 graduate of Marysville High, who spent 20 months there as a Peace Corps volunteer. "With all the schools shut down, I — and all the volunteers — had no work. For two full months there was nothing going on."

Then government halted all incoming and outgoing flights between Ulaanbaatar, the Mongolian capital, and China, South Korea and Japan, which accounted for about 80 percent of air traffic. The Peace Corps decided to evacuate all 96 volunteers in the country.

The evacuation of Mongolia preceded the worldwide Peace Corps evacuation by more than a week.

"On March 15, the agency announced it would temporarily suspend Volunteer operations and begin evacuating Volunteers from all posts due to the COVID-19 pandemic," the Peace Corps announced on its website.

Mercatante was back in Marysville by March 6.

"Next to Peace Corps-China, we were the first country to get evacuated," Mercatante said.

The outbreak of what came to be known as COVID-19 began Wuhan, China, in December.

All the roads in Mongolia flow into and out of the Ulaanbaatar, the capital, located in the north central part of the country. The government closed the roads early in February and closed public transportation later in the month.

"Once that ended, you needed a private car to get back and forth to capital," Mercatante said. "You were stuck in your town."

Nowhere
Mercatante worked out of Arvaikheer, about 400 km — an eight- or nine-hour drive — from the capital in south-central Mongolia, which gave definition to the phrase middle of nowhere.

"There was nothing surrounding my town except miles of endless steppe interrupted by the occasional mountain," said Mercatante.

Two other Peace Corps volunteers also shared the posting.

Temperatures in the winter hit 43 degrees Fahrenheit below zero.

"I don't even know how to describe it," he said.

The steppe, a subarctic grassland characterized by dirt and rocks in the winter and short grass in the summer, rolls across nearly 900,000 square miles of central and eastern Mongolia and China.

Mercatante had no hot water and no shower in his dorm, which had a hot water furnace system heated by coal and an air purifier.

"I had to use a bucket and sponge to bathe myself," he said. "I didn't have a washing machine. I washed by own clothes by hand."

In the U.S., you go outside for fresh air. In Mongolia, you go inside.

"In my town, I had to wear a pollution mask every day," he said.

Electricity was intermittent. The longest blackout he experienced was six days last summer.

"I always had a power bank with a USB port to charge my phone, a flashlight and candle," he said.

Mercatante worked as a public health educator, teaching nutrition, exercise, hygiene, food preparation, sexual reproductive health, first aid, vocational training, English and other subjects to students of all ages.

He graduated from Wayne State University with a degree in public health and has been accepted into the master's program at the University of Michigan School of Public Health to study — ironically — infectious diseases and epidemiology.

He taught in Mongolian, which he studied intensely for three months while living with a local family. Once he began teaching, he was assigned a local teaching assistant.

"At first it was a lot of gesturing and Google Translate and pointing to words," he said. "But I got used to it pretty quickly."

Mercatante's teaching assistant picked up on the rhythms and quirks of his pronunciation.

"I spoke Monglish," he said.

Time to go
"The Peace Corps had to get permission to drive us out using six private drivers," said Mercatante. "The country has 21 provinces and we had volunteers in every single one."

The drivers drove around the clock for six days getting everyone to the capital and on fights to either Moscow or Turkey.

"My route was Moscow-Berlin-Frankfurt-Washington, D.C.-Detroit," said Mercatante.

A full term of Peace Corps service is 24 months, plus the three months of training. He would be leaving his service five months early.

Because of the international emergency, all volunteers whose posting was cut short because of the pandemic will receive a completion of service certificate and the appropriate benefits.

Mercatante departed Ulaanbaatar on March 5, traveled 58 hours and — after a canceled flight, a skipped stop and flying west through 13 time zones — was home by March 6.

By the time he left Mongolia, after two months of doing nothing, he was ready. He had met his girlfriend in-country, but her tour had ended a year earlier and she was home in Columbus, Ohio.

But he was also leaving behind plenty of new friends.

"It was a bittersweet moment," he said.

He left a major TED Talks project with his students, about the future of the country, uncompleted.

"The Mongolian people are incredible," he said. "So warm and welcoming. I never met a collective culture so welcoming of strangers."

Then, suddenly, he was home. Four-lane freeways, McDonalds, billboards, bowling alleys and the crush of family and friends.

"I've adjusted pretty quickly," he said. "I'm really thankful to have hot water and a shower. I forgot how nice it was to have amenities."

It was a world that quickly became smaller. Soon after he landed, Michigan, Ohio and much of his home country were in shutdown mode, practicing social distance and trying to contain the spread of COVID-19.

Just like Mongolia.

Jim Bloch is a freelance writer. Contact him at bloch.jim@gmail.com.

70% of tourists planning to visit Mongolia in 2020 cancelled their trips due to coronavirus www.akipress.com

70% of tourists who planned and booked a trip to Mongolia in 2020 cancelled their trip due to the coronavirus pandemic, according to a survey conducted by the Mongolian Tourism Association.