China's US$1 trillion wealth fund to step up soured asset sales

[NEW YORK] China's US$1 trillion sovereign wealth fund is moving to tackle a growing pile of troubled investments such as its stake in embattled commodity trader Noble Group Holdings, even as the coronavirus pandemic makes any asset sales more difficult.

China Investment Corp (CIC) earlier this year set up a special team led by managing director Benjamin Bao in its direct investment unit to recoup value and potentially exit billions of dollars in positions that have soured over the years, according to people with knowledge of the matter. Assets being examined mainly consist of energy and mining companies that have recorded chronic losses, said the people, who asked not to be named because they aren't authorised to discuss internal matters.

The disposal of distressed assets is part of CIC's "normal investment management activities", the company said in a statement. CIC sticks to its principles as a professional, market-based investor and "tries its best to protect the company's commercial interests in every aspect of investment management", it said in the statement.

With the global recovery already slowing and other sovereign wealth funds dumping fossil-fuel assets in a push for more responsible investing, the prospects of recovery in the soured assets are dimming further, the people said. CIC last year "took robust action to dispose of distressed assets", it said in its annual report released last month, without providing details.

It remains unclear what measures could be used to recoup value from the troubled assets besides selling. While CIC hasn't assembled a special team for distressed assets before, it's not the first time the company disposed of large positions. In 2014, the public equities department's proprietary team liquidated more than 20 positions in two months, mostly through block trades.

CIC spent billions on commodity companies in the years after its inception in 2007, tapping a boom largely fuelled by China's runaway economic growth. Among the acquisitions were a US$1.5 billion deal for a 17 per cent stake in Canadian mining company Teck Resources in 2009, and an US$850 million acquisition of 15 per cent of Noble later that year. It was also among investors that bought a US$900 million stake in Chesapeake Energy in 2010.

Teck Resources's Class-B shares have fallen around 11 per cent since CIC bought in. Chesapeake filed for bankruptcy in June. Noble, which has suffered years of upheaval, in August saw its book value drop below zero amid fresh losses.

Another failed deal was the 2008 acquisition of a US$110 million stake in Brazilian oil company OGX. The company went under in 2013, wiping out almost all of CIC's investment. That became a "turning point" for CIC, prompting it to enhance project management systems and penalise 17 people, according to an internal book distributed to staff to mark the firm's 10-year anniversary in 2017.

BLOOMBERG