China Huarong proposes debt-for-equity swap

Banks will hold around 71 percent of Huarong Energy’s outstanding shares after the debt-for-equity swap, according to a report by Macquarie.

Financially-challenged shipbuilder Huarong Energy proposed swapping 17.1 billion yuan ($2.6 billion, €2.3 bilion) in accounts payable in exchange for newly-issued shares.

Under the proposal, creditor banks and suppliers of the company will acquire 14.1 billion yuan and three billion yuan-worth of shares respectively, at the subscription price of HK$1.20 ($0.15, €0.14) per share.

“In light of the depressed shipbuilding market, the group has encountered operational difficulties,” said Chen Qiang, chairman of Huarong Energy, in a statement. The proposed debt-for-equity plan aims at easing the debt burden of the shipbuilder.

A majority of the company’s bank creditors have supported the deal. Of the 22 bank lenders, 12 have issued letters of intent in support of the proposal. Those lenders make up approximately 12.6 billion yuan of the maximum subscription amount, accounting for 89 percent of outstanding bank debt.

The top four bank lenders will between them take 57 percent of the new shares handed over to banks. Caixin reported separately that Bank of China will become Huarong Energy’s largest shareholder after the swap.

In contrast to the banks, only 11 percent of the more than 1,000 supplier creditors have agreed to the proposal. Those in agreement make up just 300 million yuan of the 3 billion yuan owed by Huarong to its suppliers.

The proposal for the fresh equity means the firm’s current shares will be consolidated with every five shares making up a single newly issued share. 

The completion of the proposed shares transaction will dilute the stake of major shareholder Zhang Zhirong from 19 percent to 2 percent. 

China Huarong Energy Company Limited, formerly China Rongsheng Heavy Industries Group Holdings Limited, is an investment holding company. The company builds ships, marine engines and engineering machinery focusing on oil and gas-related activities as well as offshore engineering. 

According to local press reports, Huarong Energy lost 8.68 billion yuan, 7.75 billion yuan and 2.03 billion yuan in 2013, 2014 and the first half of 2015.