China Construction Bank (CCB), the country’s second-largest lender, has entered into a RMB 21 billion ($3.1 billion; €2.85 billion) debt-for-equity swap deal with Shandong Energy Group as China tries to cut its ballooning corporate debt, according to media reports.
The bank will set up three funds to invest in the state-owned company, China's fourth-biggest coal producer, according to Reuters.
The swap will reduce Shandong Energy's debt-to-asset ratio by six percentage points and save the group more than RMB 1 billion in financing costs.
Shandong Energy’s total assets reached RMB 270 billion by the end of October and it had RMB 1.9 billion in profits for the first ten months of the year.
Shandong's State-owned Assets Supervision and Administration Commission (SASAC), which is the state shareholder in local government-owned firms, also participated in the signing.
This is the fifth large-sum debt-for-equity swap deal with a state-owned company that CCB has done since October 2016. The bank has signed a RMB 24 billion restructuring deal with Wuhan Iron and Steel Group; a RMB 5 billion swap with China’s biggest tin producer Yunnan Tin Group; a RMB 5 billion swap with construction machinery manufacturer Xiamen CCRE Group; and a RMB 10 billion swap with Chongqing Construction Investment Holdings.
“In this round of market-based debt-for-equity swaps, neither the regulator nor banks have set specific targets on the scale and quantity of projects. But since it is a pilot, it means that not all projects will be implemented,” Zhang Minghe, head of DES projects and vice general manager of the credit extension department of CCB told the national securities newspaper China Securities Journal. “In the future, CCB and other pilot banks will launch more DES projects in succession.”
According to the national press, the bank is tracking around 50 projects involving leading companies with heavy debt in traditional sectors such as iron and steel, coal and chemical industries. The programme also prefers listed companies as they are more transparent and easier to make a conversion.
To fund the programme, CCB is also planning to establish an investment management company, according to Zhang.
In the deal with Yunnan Tin, the bank planned to raise the majority of capital from financial institutions and facilities, including insurance companies, pension funds, China Cinda Asset Management and wealth management products (WMPs).
The national press also revealed that CCB, the four other large state-owned banks, including Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and Bank of Communications (BOCOMM), and joint stock banks such as Shanghai Pudong Development Bank (SPDB) and China Merchant Bank, will also participate in DES.