State-owned Sinosteel to swap 27 billion yuan worth of debt for convertible bonds

Plan could raise the curtain for a latest wave of SOE debt spin offs

PUBLISHED : Tuesday, 20 September, 2016, 7:07pm
UPDATED : Tuesday, 20 September, 2016, 10:22pm

Sinosteel Corporation has been given the green light to swap 27 billion yuan of its debt for equity convertible bonds, potentially raising the curtain for a latest wave of debt spin-offs by state-owned companies, mainland financial magazine Caixin reported on Tuesday citing anonymous sources.

To curb fast-growing corporate debt levels, the Chinese authorities have been mulling over a debt-to-equity swap plan since earlier this year.

Caixin reported that Sinosteel is likely to swap half of its 60 billion yuan of debt – owed directly to financial institutions – into equity convertible bonds. Conversion from debt to equity will start after a three-year lock-up period.

Sinosteel is expected to set up a special subsidiary to handle the conversions, which would receive a 10 billion yuan capital injection from a Chinese central government body responsible for managing state-owned assets. This subsidiary may go public in future.

For banks this plan is more acceptable as the pressure on capital requirements would be much smaller than swapping debt into equities directly
Iris Pang, analyst, Natixis in Hong Kong

The remainder of the debt, around 33 billion yuan, would carry an interest rate of roughly 3 per cent, Caixin reported, with noted financial institutions choosing different proportion of their loans to swap.

Sinosteel was unavailable for comment on Tuesday.

Iris Pang, an analyst with Natixis in Hong Kong, said it was unknown whether the conversion into equity was mandatory or not, or whether the bonds will be tradable on public markets before the conversion. The coupon rate of the bonds also remains unknown.

“But in general, for banks this plan is more acceptable as the pressure on capital requirements would be much smaller than swapping debt into equities directly,” she added.

China’s state-owned sector had accumulated total liabilities of 83.74 trillion yuan by the end of July, up 17.6 per cent year on year, and representing 66.2 per cent of total assets, official data shows.