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As investors brace for the biggest dollar default by a Chinese government-owned borrower in decades, a new breed of state asset managers tasked with cleaning up the mess is gaining equal attention.

Trading firm Tewoo Group Corp., a onetime Fortune Global 500 company that seemed like a good bet for a full official bailout thanks to its state ownership, is struggling to make payments on its $2.05 billion of offshore debt.

The plan now conceived by Tianjin, the municipal authority in northeast China that oversees it, is to put Tewoo in the hands of a little-known but powerful local asset manager modeled on the success of Singapore’s state investment firm Temasek Holdings.

Tianjin State-owned Capital Investment and Management Co., the mastermind behind Tewoo’s debt revamp, is one of more than 100 asset managers set up across China in recent years. The firms, with four in Tianjin alone, have become a key plank of Beijing’s overhaul of the nation’s cumbersome and inefficient state sector.

Tempering Damage

As China battles against a slowing economy and mounting debt, these relatively obscure entities are now emerging as a key force in policy makers’ efforts to allow more ailing SOEs to fail while avoiding a full-blown financial crisis. The thinking is that oversight by a dedicated financial-asset manager could encourage market discipline without the sort of corporate destruction wrought by unbridled U.S.-style capitalism.

For investors, there’s substantial pain in store. Tianjin State-owned Capital said last month it will offer Tewoo bondholders either a haircut of as much as 63% on $1.25 billion of notes, or replacement securities in its own name with significantly lower coupon payments.

Past Record

The silver lining is that this state manager already has claimed one success since being set up in 2017. Tianjin State-owned Capital played a leading role in the overhaul of Bohai Steel Group Co., according to a document seen by Bloomberg outlining Tewoo’s debt restructuring plan. Bohai’s collapse in 2016 marked one of the biggest failures of a state-owned enterprise in China in years. The steel company returned to profitability in the second quarter of this year, according to the Tianjin asset manager.

“The role of this new entity serves multiple purposes,” said Roy Kwok, a partner and senior portfolio manager at DeepBlue Global Investment in Hong Kong. “It offers overseas investors a solution to exit their position in an orderly manner (while taking some haircut) instead of participating in the messy local-reorganization process,” he said. It also offers a path to health for the borrower through reorganization, he said.

Under the stewardship of Zhou Hongbin, a former official in his early 40s with a doctorate in engineering from the National University of Ireland, Tianjin State-owned Capital says it uses restructuring and investment to “promote industrial consolidation.” The focus is on sectors plagued by overcapacity.

Zhou’s office didn’t respond to a request for comment.

Profit Making

The firm has a portfolio of seven SOEs from Tianjin, including the city’s water supplier, property developer and financial-leasing firm. At the end of June, the group’s assets totaled 14.5 billion yuan ($2.1 billion), with liabilities of 3.6 billion yuan. Its first-half profit increased 7% to 259.6 million yuan from a year ago. It may seek an overseas credit rating as soon as next year, the firm said on a recent investor call.

Tewoo has been a focus for market participants for months, being one of a number of troubled borrowers from Tianjin, an industrial megapolis plagued by old-line industries with excess capacity.

Tewoo’s limited pool of hard assets meant that creditors would have been left with little recourse in the case of a bankruptcy, so the takeover by the state-owned asset firm is welcome, said Chen Su, a bond investment manager at Qingdao Rural Commercial Bank.

Singapore Model

“They look like an elementary version of Temasek,” Chen said of the new generation of local government financial-holding firms.

In another sign of exploring fresh ways to absorb a swelling debt pile in the state sector, Beijing also has called on asset management firms set up by regional authorities to help take over debt owed by the country’s local government financing arms, according to 21st Century Business Herald, a Chinese newspaper.

Tewoo operates in industries ranging from infrastructure to logistics and mining, and its pending default would mark the biggest China SOE failure in the dollar bond market since the collapse of Guangdong International Trust and Investment Corp. in 1998.

“This incident is the latest sign that state-backed rescues of struggling state-owned enterprises are not automatic, especially at the regional and local government level,” Moody’s Investors Service analysts including Ivan Chung in Hong Kong wrote in a Nov. 28 note. “SOEs engaged in purely commercial activities that are not strategically important to the government, such as commodity trading, are less likely to receive government support.”

— With assistance by Ina Zhou, Tongjian Dong, and Xize Kang