China’s banks swap 1 trillion yuan of debt into stocks, extending financial life line to state debtors
More than 70 of the country’s most indebted companies in steel, coal, chemical and equipment manufacturing reached debt-to-equity swaps.
China’s banks converted more than 1 trillion yuan (US$149.2 billion) of debt into stock holdings in more than 70 state-owned enterprises, in the government’s largest debt-to-equity swap effort to bail out the country’s most indebted borrowers, according to the official China New Agency, citing a notice by the state planning department.
The scheme, signed between Chinese banks and companies in the steel, coal, chemicals and equipment manufacturing industries, has helped to lower the aggregate debt ratio in these industries, the agency reported, citing the National Development & Reform Commission (NDRC).
The government is anxious to reduce the debt owned by the moribund state sector to shield the country’s financial system from the risks of defaults, while the economy’s growth pace slows.
The idea of swapping banks’ debts into equity holdings was raised by China’s Premier Li Keqiang during the National People’s Congress in March last year. It wasn’t a new idea. The scheme was used during the 1990s to clean up the books of China’s state banks.
Still, the swaps were complicated by a set of draft rules released by the China Banking Regulatory Commission (CBRC) a day before the NDRC announcement, which left more questions than answers regarding the details of the exchange.
For example, some banks have channelled fund they raised through wealth management products from retail investors into the debt-to-equity swap programmes. It isn’t immediately clear whether that practice is allowed under the CBRC’s latest draft rules, Chen said.
Investors are keen to know more details, including how the shareholding structure of the target company will be changed, and the risk weightings brought by the investment for banks, she added.
The largest shareholder, which holds more than 50 per cent stake in a debt-to-equity swap unit should be a locally incorporated commercial bank. Other qualified shareholders (non-bank financial institutions) include less than 42 brokers, around 20 insurance firms, and some trust firms, according to the draft rules.
Improving corporate leverage has helped China’s bond defaults to slow in 2017, according to a report by Goldman Sachs.
Based on industrial profits, earnings improvements are spreading further downstream, relieving the corporates’ debt stress, it said.
“The median level gross debt-to-EBITDA, a measure of profitability, fell to 2.1 times at the end of 2016, the first reduction after five years of increases, while net debt-to-EBITDA fell to -0.2 times,” the report said.