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Debt-for-equity proposal worrying bankers
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SEVERAL senior bankers and analysts have expressed concerns about a proposal to convert bad debt into equity as a way to deal with the rise in non-performing loans. Many have questioned how the government will proceed with the planned swaps, and pointed to the risks and pressures they would create for lenders.
“It’s hard to evaluate how effective the swaps will be,” said Tian Guoli, chairman of the Bank of China, adding that the tools might not work due to the way the market environment has changed over the past 20 years.
His comments echoed remarks made by Wang Hongzhang, chairman of China Construction Bank, and Sun Deshun, vice president of China Citic Bank, at the Boao Forum last week. Both suggested that the swaps should be capped as they could be detrimental to the interests of shareholders.
The idea of a debt-equity swap was raised by the China Banking Regulatory Commission during the annual parliamentary session in Beijing as a way to clear some of the 1.27 trillion yuan (US$196 billion) worth of bad loans currently sitting on banks’ balance sheets. Most of the money is owed by struggling state-owned enterprises.
Premier Li Keqiang singled out debt-for-equity swaps at the annual meeting as a way to “progressively reduce corporate leverage.”
CBRC Chairman Shang Fulin, however, said the swaps would not be easy to execute and the plan was still being considered.
Debt-equity swaps were first used by the Chinese government in 1999 when taxpayers underwrote central bank funding for a wave of SOE reforms.
On that occasion, the non-performing loans were sold to four state-owned asset management companies that specialized in dealing with bad debt, relieving the banks of the burden.
Earlier this month, the heavily indebted Chinese shipbuilder China Huarong Energy Co — formerly known as Rongsheng — said it planned to issue equity to its creditors, instead of repaying some of the 14 billion yuan it owed in bank loans.
Analysts, however, were quick to point out that unlike in 1999, the nations’ biggest lenders are now listed companies and no longer wholly owned by the state.
“It’s not just a bad deal for the banks, they can’t technically make it work,” Li Xuenan, assistant professor of finance at Cheung Kong Graduate School of Business, told Shanghai Daily.
“Under current regulations, they would have to raise their core capital adequacy ratios by a factor of four to offset the potential risk of the equity they held in industrial or commercial companies,” she said.
“Two years after that, the requirement would rise to 12.5 times in case they had to seize collateral on failed loans.”
Tough times for banks
China’s banks are going through their worst period for decades due to slowing economic growth and steep rise in bad loans.
The Bank of Communications, the first of the country’s Big Five to report its 2015 earnings, said on Tuesday that it nearly doubled its bad-debt provision in the fourth quarter of last year to 7.5 billion yuan.
Some market watchers have expressed concerns that without backing from the government — in the form of cash injections or easier capital rules — debt-equity swaps will simply shift the problem from SOEs to banks, with potentially serious consequences.
Li Jian, an analyst with Guotai Junan Securities Co, took a more pragmatic view of the proposal.
“The idea has advantages other than making banks’ balance sheets look prettier,” he said in a recent report.
“Companies can reduce their bad loans to improve their credit profiles, borrow more from banks and keep their businesses running. Banks can benefit from better corporate profits,” he said.
“But if the move does nothing to improve a company’s business, then its better just to let it go bankrupt.”
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