BEIJING—China Cinda Asset Management Co., which long ago outlived its original role as a “bad bank,” is about to launch an initial public offering of up to $2.46 billion even as it has been borrowing billions more in an effort to reinvent itself as a lender to cash-strapped Chinese firms, an exchange filing on Monday shows.



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The IPO highlights a change in strategy that has seen Cinda emerge as one of the fastest-growing institutions in China’s financial sector, and a major player in the country’s property market. In its traditional role, Cinda used government-backed funds to buy nonperforming loans from Chinese banks that often needed many years to resolve. Now it is betting on faster turnarounds, borrowing from banks to help companies with cash-flow problems, and expecting a payback within three years.

Its initial filing on Monday with Hong Kong’s stock exchange showed that those bets are getting bigger, with the firm’s total assets almost doubling between the end of 2010 and the end of June this year.

While Cinda’s new approach promises lucrative returns, it also carries risks: Given the Chinese economy’s slowing growth, companies that are short of cash today may take longer than anticipated to repay their loans.

With the slowdown coming after a multiyear lending boom, analysts expect bad loans in China’s banking system to start rising. Many of China’s exporters are already under strain, and industries such as solar components, shipping and steel that ramped up borrowing during the good times are saddled with vast production overcapacity.

That has sparked significant investor interest in a company that was created to deal with nonperforming loans in 1999 and help China’s state-owned banks and industries dig out from mountains of debt. Unlike comparable institutions set up in other countries to resolve bad loans, Cinda and three other specially created asset-management corporations weren’t wound down.

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  • Getting a Look into China’s Bad Bank

Instead, in 2006 Beijing directed them to start operating along commercial lines. The four firms started to reinvent themselves as financial-services conglomerates. They added insurance and securities companies, and nonbank lenders such as trust and leasing companies. Such businesses account for about a third of Cinda’s revenue, but only about 5.5% of its profit.

A raft of buyers has committed as cornerstone investors in advance of Cinda’s IPO, including New York-based


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Cinda is going to investors with a relatively new business model. Traditionally the firm would buy bad loans directly from the banks—using government-backed funds—and then try to get some cash or assets out of the borrower.

Over the long term that sometimes yielded high returns, particularly when Cinda was able to swap the bad loans for equity in a company, a process that has left Cinda with stakes in dozens of coal miners. For the most part, reaping profits was a time-consuming process often involving courts and negotiations with local governments that had a vested interest in keeping firms in their area functioning.

Cinda switched gears in 2010 when it started borrowing from banks. By the end of last month the company had amassed 161 billion yuan ($26.4 billion) worth of outstanding loans, mainly from commercial banks, up more than 20 times from 7.8 billion yuan at the end of 2010. In the three months between July and October alone, the company took on an additional 57 billion yuan worth of debt, an increase of 55%.

Cinda still buys nonperforming loans directly from banks and other financial institutions—a business that has grown about sixfold since the end of 2010—but most of the growth in Cinda’s borrowing has gone toward buying debts that companies owe each other, such as when a company sells a product to a customer but doesn’t get paid on time.

“We enhance the value of existing distressed debt assets through restructuring…for enterprises in temporary liquidity difficulties,” the company said in Monday’s filing. Restructuring might include giving the company more time to pay—typically between one and three years—as well as charging an interest rate.

So far, the biggest beneficiaries of Cinda’s new approach are property developers. In an effort to cool a frothy real-estate market, Beijing directed China’s banks and then its trust companies—a type of wealth-management firm—about three years ago to pare back on new lending to developers, leaving many real-estate firms strapped for cash. Cinda stepped in. In the 18 months covering 2012 to mid-2013, the amount of credit Cinda had extended to the real-estate sector rose by 47 billion yuan. That equals roughly 40% of the amount of new financing China’s more than 60 trust companies—the sector’s usual nonbank lender—had extended to the property sector over the same period. In 2010, only 625 million yuan worth of credit extended by Cinda had gone to real estate.

China’s property market remains buoyant, with prices in major cities spiraling upward, but some analysts say smaller cities are showing signs of having an oversupply of apartments, which could cause problems for debtholders.

Cinda posted profit of 7.217 billion yuan in 2012, up 6.3% from 6.786 billion the year before. The 2011 figure was down 9.5% from a year earlier in part due to the company’s insurance operations. Insurance companies often post losses in their early years as they build the business.

—Grace Zhu contributed
to this article.