Huarong debt vote may break new ground for China zombie firms, banks

China Huarong Energy Co

23/03/2016 06:15

* A $2.7 bln proposal for creditors to swap debt to equity 
    * Central bank preparing regulations to allow debt-to-equity 
swaps 
    * Investors worry banks may be saddled with sub-standard 
equity 
 
    By Saikat Chatterjee 
    HONG KONG, March 23 (Reuters) - Shareholders of heavily 
indebted China Huarong Energy Ltd  1101.HK  will vote Thursday 
on a ground-breaking debt-for-equity swap plan that has stoked 
concern about the implications for Chinese banks taking on risky 
equity stakes. 
    China's central bank is preparing regulations to allow banks 
to swap debt for equity. Up until now, lenders have only done so 
through investment units using opaque channels. A deal for 
Huarong would be the first known instance of a swap at a listed 
firm and is expected to pave the way for a raft of other 
debt-laden companies to follow suit. 
    Allowing banks to exchange debt for equity would help their 
balance sheets in the short-term by putting a lid on 
non-performing loans which have grown to decade highs. 
 urn:newsml:reuters.com:*:nL4N16I32F 
    But it also opens what some analysts and investors say is a 
dangerous door to Chinese banks investing in weak non-financial 
firms, as they would be saddling themselves with sub-standard 
equity stakes that would likely be worth less than debt in the 
event of bankruptcies.     
    That is very different from the status quo where lenders are 
only allowed to invest in financial firms. 
    "I can't see this being positive for the banks any way you 
slice it," said a fund manager at an Asian fund, declining to be 
identified as he was not authorised to speak to the media. 
    "If banks are being forced to convert more of these dud 
loans into equity, we may be looking at massive bank capital 
injections down the line," he added. 
    Huarong has proposed creditors would swap 17.8 billion yuan  
($2.7 billion) in debt for nearly 90 percent of the company. 
Minority shareholders will see their combined holdings shrink to 
7 percent from 64 percent. 
    The banks, whose names have not been disclosed, are expected 
to accept it as they would little chance otherwise of recovering 
their loans, analysts have said. Shareholders are also expected 
to vote in favour as it lowers the position of creditors to a 
similar footing to other stakeholders, even though minority 
holdings would be drastically diluted. 
    Analysts note that under mainland regulations, exposure to 
equities carries higher risk-weighted capital on balance sheets, 
sometimes four to 12 times that of loans.  
    They add that banks can also unload bad loans to state-owned 
asset management companies like Cinda Asset Management  1359.HK  
but it is not clear how they would realistically offload 
unattractive equity stakes. 
    Since making its transition from the troubled shipping 
industry to energy last year, Huarong has seen 80 percent of its 
market capitalisation wiped out, compared with a 28 percent 
decline for the benchmark Hong Kong index  .HSI  in the same 
period. 
    Losses from operating activities have grown in recent years 
and debt has increased. The company owes 22.4 billion yuan to 
creditors, 80 percent of which is either overdue or due over the 
next 12 months. 
    David Yin, an assistant vice president at ratings agency 
Moody's Investors Service, said he was particularly keen to see 
how many other firms would follow in Huarong's footsteps. 
 
($1 = 6.4922 Chinese yuan) 
 
 (Reporting by Saikat Chatterjee; Editing by Anne Marie Roantree 
and Edwina Gibbs) 
 ((annemarie.roantree@thomsonreuters.com; +852 97387151; Reuters 
Messaging: annemarie.roantree.thomsonreuters.com@reuters.net)) 
 
Keywords: HUARONG ENERGY DEBT/