Sinosteel to try debt-to-equity swap to restructure loans

Proposal may cut debt load to 60 billion yuan, from 100 billion yuan

PUBLISHED : Wednesday, 17 August, 2016, 9:14pm
UPDATED : Wednesday, 17 August, 2016, 9:14pm

SinoSteel, weighed down by an estimated 100 billion yuan (HK$117 billion) of loans, may become one of the first Chinese state-owned steelmaker to swap part of its debt into equity, the last resort for banks to address the long-standing debt crisis, the mainland media reported.

The steelmaker has been struggling with bankruptcy since 2014. Operating 72 subsidiaries, Sinosteel owed an estimated 100 billion yuan to more than 80 banks at the end of 2014, Caixin magazine reported.

The debt load may be cut to 60 billion yuan after restructuring, according to a plan pending State Council approval. China’s bank regulator was instructed by the State Council to lead negotiations on the negotiations, Caixin said.

Debt restructuring plans were first submitted in March, but delayed by the default of the Tianjin government-owned Bohai Steel Group, as well as the Liaoning government-owned Dongbei Special Steel, the 21st Century Business Herald said.

In July, angry investors voted to reject a proposal by Liaoning government to turning 70 per cent of the debt into equity.

Debt-to-equity swaps were used during the late 1990s by former premier Zhu Rongji, when state-run banks offloaded an estimated 1.4 trillion yuan of non-performing loans to four newly-created state asset management companies.

Those asset management firms changed part of loans into equity, cleaning up the bank’s account books and paving the way for fresh capital from strategic investors and public stock offers.

Now, premier Li Keqiang is aiming to apply the same approach to clean up the books of unprofitable state firms and clear their debts.

The Chinese government earlier this year confirmed reports of debt-to-equity swaps to help clean up non-performing loans and heavy debt loads.

In August, the bank regulator sought industry and public feedback on a draft on how to deal with the debt of steel mills and coal mines, saying it encouraged “market-oriented” debt-to-equity swap approaches.

Unlike the 1990s, the government would not bail banks out this time, or take the responsibility to clean up the bad loans, Renmin University professor Zhao Xijun said.

Caixin reported that the latest debt-to-equity swap guideline mainly covers bank loans on a vague and ill-defined case-by-case approach.

There are worries fearing such a plan could become a way for indebted state firms or zombie companies to avoid paying back debts.

China Construction Bank’s chairman Wang Hongzhang said in March that it should not convert bad debt into bad equity.