New rule on debt-for-equity adds risk to process, warn analysts
Banks not now allowed to directly swap non-performing loans. Instead, they need to transfer them to qualified implementing agencies
The long-awaited guideline on debt-for-equity swaps will help shed light on how the scheme unfolds, but analysts are concerned it could make implementation more difficult and lead to risks.
First proposed by Premier Li Keqiang in March this year, the debt-for-equity scheme is viewed as a priority for Chinese leaders to reduce soaring leverage in the corporate sector, which hit 169 per cent of gross domestic product in the first quarter.
Under the new guideline, released by the State Council last week, banks are not allowed to directly swap non-performing loans. Instead, they need to transfer them to qualified implementing agencies, including asset management companies and state investment firms, which will then convert the loans into equity. The conversion price is to be determined by the market and negotiated by banks, investors, debtors and the implementing agencies.
“That makes swap negotiations even more complicated,” said Ivan Chung, the head of greater China credit research at Moody’s Investors Service in Hong Kong.
For one swap to close, two kinds of negotiations have to be completed. That brings more uncertainty to the whole process
The concern is echoed by Liao Qing, a senior director at financial institutions ratings at Standard & Poor’s in Beijing.
“Under the new framework, for one swap to close, two kinds of negotiations have to be completed – the negotiations between banks and the implementing agencies about the purchase of debt holdings and then those between the agencies and the bond issuers about how to swap debts with equities. That brings more uncertainty to the whole process,” said Liao.