Caixin
Jan 27, 2018 08:53 PM
FINANCE

Public Tapped to Fund Debt-for-Equity Swaps

Chinese regulators have given banks the go-ahead to tap the public for funds that will ultimately be used to finance debt-for-equity swaps for over-leveraged enterprises.

The explicit approval was given in a new set of guidelines for debt-for-equity swaps, one of the solutions that regulators have been pushing to deal with the country’s immense corporate debt problem. So far, however, it is a solution that has been slow to get off the ground.

Under the new guidelines, banks are encouraged to raise money from customers, including individuals and institutional investors, by selling them wealth-management products whose proceeds can be invested in private equity funds that finance debt-for-equity swaps, according to the announcement published late Thursday on the National Development and Reform Commission’s (NDRC) website.

The guidelines also encourage investors participating in debt-for-equity swap projects to set up private equity funds to raise and invest money in enterprises in need of debt relief, according to the announcement, which was released jointly by the NDRC, the central bank and several other industry and financial regulators.

Industry observers see the regulatory move as a response to criticism that the debt-for-equity swap program has been slow to ramp up.

So far, multiple borrowers across the country have reached debt-for-equity swap agreements with their lenders. The agreements involve more than 1 trillion yuan ($156.5 billion) in debt, a source close to regulators told Caixin. However, only 30 million yuan in projects has gotten off the ground.

In September 2016, the central government launched the debt-for-equity swap program, which allowed enterprises’ bank loans to be converted into equity. The program aims to help banks deal with bad loans on their books, while taking some of debt burden off financially struggling companies, particularly those in state-dominated industries suffering from excess capacity, such as coal and steel.

As China's laws generally prohibit commercial banks from directly holding equity in nonfinancial institutions, banks are encouraged to transfer their loans at negotiated prices to other investors, including insurers’ asset management subsidiaries, state-owned investment companies, the investment arms of banks, and asset management companies under the central and local governments. These investors receive government support to participate in debt-equity swap projects.

China’s top regulators have been pushing debt-for-equity swaps to reduce high corporate leverage, often seen as the root of weakness in China’s financial system.

As of the end of 2016, China’s overall debt was equivalent to 247% of gross domestic product (GDP), with corporate debt amounting to 165% of GDP —figures high enough to draw concern from international organizations such as the International Monetary Fund.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)

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