China gets steelier about debt restructuring

China Huarong Energy Co

22/09/2016 05:07

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are her own.) 
    By Rachel Morarjee 
    BEIJING, Sept 22 (Reuters Breakingviews) - China is getting 
tougher with debt-laden firms in moribund sectors. Metals trader 
Sinosteel has agreed a $4 billion workout, in a compromise that 
could be a template for restructuring other troubled outfits. 
Meanwhile, a smaller miner has been allowed to fail.   
    Sinosteel's overhaul, as revealed by Caixin magazine, is a 
fudge because the firm, its shareholders and many of its 
creditors are all different arms of the government. So politics 
probably played as big a role as economics in deciding how the 
deal was structured. 
    Still, it gives the biggest state-owned steel trader a 
fighting chance of survival. Just under half of the company's 
debt to more than 80 Chinese and foreign banks will be swapped 
for convertible bonds. These will convert into shares over three 
years from 2019. That drawn-out process gives Sinosteel time for 
a turnaround, while presumably lowering its debt servicing 
costs.  
    This setup is better than expected for lenders. Earlier this 
year, China said it would tackle bad debt in troubled sectors 
like steel, coal and cement by forcing banks to swap loans into 
equity. That sparked an outcry from banks and their regulator, 
who argued any improvement to bad loan ratios was far outweighed 
by the hit to capital ratios because equity holdings have a 
higher risk weighting than loans. 
    This deal involves no immediate equity holding, and spreads 
the pain among various banks, the company, and the central 
government, which is injecting 10 billion yuan of fresh capital. 
Contrast that with the March deal in which Bank of China 
 601988.SS   3988.HK  took a $2.7 billion stake in China Huarong 
Energy  1101.HK , becoming the ailing shipbuilder's majority 
shareholder.  
    Also this month, miner Guangxi Non-Ferrous Metals Group was 
allowed to go bankrupt. The firm has $2.2 billion dollars of 
debt and its failure leaves 108 creditors in the lurch, Caixin 
says. Multiple rescue attempts had already failed so none of the 
larger state-owned firms were willing to step into the breach. 
That shows a healthy willingness to let the worst firms fail.  
    Taken together, both episodes suggest China is getting a 
little bit steelier about leverage. 
    
    On Twitter https://twitter.com/morarjee 
     
    CONTEXT NEWS 
    - Sinosteel, the Chinese miner and metals trader, will swap 
half of its debt for convertible bonds, Chinese financial 
magazine Caixin reported on Sept. 20, citing anonymous sources. 
The 27 billion yuan ($4 billion) debt-to-equity swap represents 
just under half of the company's debt owed directly to financial 
institutions, the report said.  
    - The remaining debt would still need to repaid, but at a 
low interest rate of 3 percent. In addition, Sinosteel would 
also set up a subsidiary to handle the conversions that would 
receive a 10 billion yuan capital injection from a Chinese 
central government body responsible for managing state-owned 
assets, the online magazine added.  
    - On Sept. 12, Guangxi Non-Ferrous Metals Group was declared 
bankrupt by a court in southern China, Caixin said in a separate 
report. The company had 14.5 billion yuan of debt and was the 
first interbank bond issuer to go bankrupt, the report said. 
    - For previous columns by the author, Reuters customers can 
click on  MORARJEE/  
 
  
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
China's first debt-to-equity swap plan approved - report    
 urn:newsml:reuters.com:*:nL3N1BW1Z2  
Court in China declares state-run metals firm bankrupt     
 urn:newsml:reuters.com:*:nL3N1BW1AO 
BREAKINGVIEWS - China debt swap could leave banks in a capital 
hole       urn:newsml:reuters.com:*:nL4N16J1PL 
BREAKINGVIEWS - Steel deal will test China's reform mettle     
 urn:newsml:reuters.com:*:nL4N19K1PE 
Caixin Sinosteel story (Chinese)    http://finance.caixin.com/2016-09-20/100989783.html 
Caixin Sinosteel story    http://english.caixin.com/2016-09-20/100990101.html 
Caixin Guangxi non-ferrous metals story    http://english.caixin.com/2016-09-20/100990098.html 
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 (Editing by Quentin Webb and Katrina Hamlin) 
 ((rachel.morarjee@thomsonreuters.com;)(Reuters Messaging: 
rachel.morarjee.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA DEBT/SINOSTEEL BREAKINGVIEWS