High-speed rail builder China Railway swaps out debt for US$1.8 billion in fresh cash

The company, at the forefront of the country’s ‘railway diplomacy’, is expected to play a big role in the country’s belt and road global trade push

PUBLISHED : Friday, 15 June, 2018, 7:02am
UPDATED : Friday, 15 June, 2018, 7:02am

China Railway Group, which spearheads the country’s ‘railway diplomacy’ push to extend its influence around the world, has won fresh funding of 11.6 billion yuan (US$1.8 billion) by swapping debt into equity under a government-backed initiative to help state firms cut debt.

According to a stock exchange filing, the company said nine investors took part in the swap, with the new money going to four of its subsidiaries to lower their debt levels, while also cutting the parent company’s stakes in the four.

The company is the latest state-owned enterprise to effect a debt-to-equity swap under a programme first introduced in 2016 as the authorities fretted over high debt levels at state firms. The idea is to have holders of debt in the company take stock holdings instead, helping the companies and avoiding lenders having to write off bad debt.

China Railway Group is at the forefront of China’s push to build high-speed rail networks as part of Beijing’s global diplomatic efforts, and is expected to play a large role in the country’s “Belt and Road Initiative” to link China with the world through trading links and infrastructure.

It has worked on projects in Indonesia, Laos, Russia and Ethiopia, according to its website, but has also had some setbacks. In 2016 private US firm XpressWest terminated a joint venture with China Railway to build a high-speed line between Las Vegas and Los Angeles, while a planned high-speed project in Venezuela failed the same year as the country’s economy collapsed.

According to the stock filing, the nine investors are China Great Wall, China Orient, China Cinda, Structural Reform Fund, Suida Investment, BOC Asset, ICBC Financial, BOCOM Financial and China Reform.

The first three are among the top four bad-debt managers in China, and will together transfer 4.5 billion yuan worth of debt into equity. The rest of the investors will pay cash in exchange for the debt. Suida Investment is the only non-state-controlled company among the investors, but is little known. The filing only said it was a limited liability partnership engaged in industrial investment and investment management.

The four subsidiaries that will receive the funding are China Railway Erju Engineering, China Railway No.3 Engineering, China Railway No.5 Engineering and China Railway No.8 Engineering.

On completion of the deal, the China Railway Group will see its stakes in the four subsidiaries decline from 100 per cent each to 74.7 per cent, 70.6 per cent, 73 per cent and 76.2 per cent respectively. China Railway is listed in both Shanghai and Hong Kong.

What’s pushing Chinese high-speed train projects off the rails overseas?

It is estimated that the assets to liability ratio of the group will decrease by 1.37 percentage points to 78.5 per cent after the deal, and the company is expected to save the annual interest costs of some 580 million yuan.

For 2017, China Railway Group reported a rise of 7.8 per cent in revenue to 693.4 billion yuan and an increase of 28.4 per cent in net profit to 16.1 billion yuan.