BEIJING (Reuters) – Two of China’s largest state banks are considering setting up new companies for the purpose of handling debt-to-equity swaps, officials at the two lenders said, in the latest steps taken to mitigate the heavy debt burden that has put a strain on corporate earnings.
Earlier this year, Chinese policymakers introduced the debt-to-equity swap program to convert some bank debt into equity, as a way to reduce China’s corporate debt overhang, a result of firms finding it tougher to repay their loans in leaner times.
“Our goal is to do as many of those projects as we can,” said Zhang Minghe, head of the debt-for-equity work team at China Construction Bank Corp (CCB) <601939.SS><0939.HK>, the country’s second biggest lender, during the bank’s post-earnings call late on Friday.
Bank of Communications Co (BoCom) <3328.HK><6013289.SS> also said it was exploring the possibility of setting-up a new entity focusing on debt-for-equity swaps in a separate post-earnings call late on Friday.
Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP), which some economists fear could destabilize the world’s second largest economy.
State-owned CCB has been leading China’s latest round of debt-for-equity swaps, announcing two multi-billion deals since Beijing re-launched the scheme earlier in October.
CCB has more than 50 debt-for-equity swap deals in the pipeline, which will span a variety of sectors.
“As in the Wuhan Steel and Yunnan Tin swaps, which involved steel and non-ferrous metals industries that are struggling with over-capacity, we will also choose from leading firms in other overcapacity sectors such as the highly indebted coal and chemical industries,” Zhang told analysts.
Banks can expect to receive more favorable deal arrangements and pricing, if they use related institutions to conduct the swaps, bankers have told Reuters.
CCB’s two deals were conducted by related institutions – CCB Trust Co, CCB Principal Capital Management Co and CCB International (Holdings) Ltd, the bank has previously disclosed.
Earlier this month, CCB agreed to set up a 24 billion yuan ($3.55 billion) transformation and development fund with Wuhan Iron and Steel Group Corp to help the steel firm reduce leverage.
CCB’s board and management team look at debt-for-equity swaps as “an opportunity” to better combine traditional banking with equity investment, and is “actively applying and preparing” an AMC-like institution to focus on debt, equity investment and corporate daily management, Zhang said.
($1 = 6.7698 Chinese yuan renminbi)
(Reporting By Shu Zhang in BEIJING and Engen Tham in SHANGHAI; Editing by Shri Navaratnam)