Debt-to-equity swap has fallen to more than 900 billion banks, contributing half of the total.

 Debt-to-equity swap has fallen to more than 900 billion banks, contributing half of the total.

Less than two years after the establishment of the bank system debt-to-equity swap franchise has become the main force of debt-to-equity swap. At present, there are 254 debt-to-equity swap projects implemented by financial asset investment companies of five major banks of China-Agriculture-Industry Relations, with a landing value of 400 billion yuan, accounting for 44% of the landed funds and contributing nearly half of the landed funds. Among them, 250 billion yuan of social capital was raised through private equity investment funds, private equity management products and other channels.

At the executive meeting of the State Council held on May 22, it was requested that the next step be to work hard on the increment, expansion and quality improvement of debt-to-equity swap. It is proposed that we should establish a reasonable pricing mechanism for debt-to-equity swap, actively attract social forces, improve policies, and solve the problems of higher risk weights and more capital occupied by financial asset investment companies in holding debt-to-equity swap.

Expanding Fundraising Channels

In the last round of policy-oriented debt-to-equity swap, the funds came from the state financial allocation. Under the market-oriented debt-to-equity swap, the integration of fund raising is the precondition to restrict the progress of debt-to-equity swap. How to expand the channel of debt-to-equity swap?

In July 2018, the Peoples Bank of China released about 500 billion yuan of targeted reduction to support market-oriented debt-to-equity swaps. Huang Xiaolong, head of the Financial Stability Bureau of the Peoples Bank of China, said that the driving role of directional alignment was obvious. The new landing amount after the directional alignment is 508 billion yuan. As commercial banks are familiar with the situation of enterprises, their financial support for private enterprises has been further strengthened. At the end of April, 17 Commercial Banks carried out market-oriented debt-to-equity swaps for 24 private enterprises, of which 22 were newly invested after the benchmark reduction.

How to raise funds through multiple channels for financial asset investment companies to become the main force of market-oriented debt-to-equity swap?

As a wholly state-owned large bank, the registered capital of financial asset investment companies is in the scale of 10 billion, relying on the strong capital strength of the parent bank.

Huang Xiaolong introduced that the implementation agencies of debt-to-equity swap in the banking sector actively expand the channels of raising funds by setting up subsidiaries of private equity funds and cooperating with industrial funds and local governments. Among them, 250 billion yuan of social funds were raised through private equity funds, private equity products and other channels. The Regulations on the Management of Financial Asset Investment Companies (Trial Implementation) issued by the Banking and Insurance Regulatory Commission in June 2018 requires that the private equity funds applied for by debt-to-equity swap institutions should raise funds for qualified investors, but the appropriate management and information disclosure of investors should be strengthened, and investors should be clearly informed of the funds raised for debt-to-equity swap projects.

Economic reporters in the 21st century have noticed that the Agricultural Bank of China (ABC) has established a wide range of funds related to debt-to-equity swap with central enterprises, local AMC and government investment funds, while the Construction Bank has issued the inter-bank first-order debt-to-equity swap asset-backed notes business.

A senior business manager of an asset management company told economic reporters in the 21st century that market-oriented debt-to-equity swap needs to pay particular attention to the difference between debt funds and equity funds, the deadline requirements of debt funds, and a certain expectation of the level of returns. Under the requirement that the term and purpose of the new regulations should not be mismatched, the exit time and return of debt-to-equity swap projects are uncertain and need to be considered in a longer term.

At the National Regulatory Meeting, it also proposed to support financial asset investment companies to initiate the establishment of asset management products, and allow investment in insurance funds, pensions and so on. Explore public offering products to participate in debt-to-equity swap in accordance with the law and regulations. Encouraging foreign capital to invest in implementing institutions.

Lian Weiliang, deputy director of the Development and Reform Commission, said at the aforementioned briefing that the participation of social forces in debt-to-equity swaps emphasizes pluralism of subjects and modes. The main body of diversification is that investors with various ownership characteristics, such as private capital and foreign capital, can participate in the market-oriented legalized debt-to-equity swap on an equal footing according to law. There are many ways to participate in market-oriented legalized debt-to-equity swap, including strategic investment, institutional investment and financial investment.

Market Pricing Difficulties

Of the 106 enterprises that implement debt-to-equity swap, 24 are private enterprises, while the others are mainly Central and local state-owned enterprises.

A market participant told an economic reporter in the 21st century that, in contrast, central and local state-owned enterprises have implicit government credit support, and the reduction of leverage has less impact on their operation and financing; private enterprises need more market-oriented debt-to-equity bailout.

Lian Weiliang said that the next step will definitely increase the proportion of private enterprises. On the one hand, private enterprises themselves will convert debt into equity. Yuanxing Energy, Nanjing Iron and Steel and other private enterprises will reduce the short-term debt-servicing pressure of enterprises through debt-to-equity swap, improve the governance structure and present good prospects for development. On the other hand, private enterprises participate in the debt-to-equity swap of state-owned enterprises, such as Shagang and Delong Iron and Steel, holding the reorganized Northeast Special Steel and Bohai Iron and Steel respectively.

In the implementation of market-oriented debt-to-equity swap, a major difficulty lies in the difficulty of pricing.

Lian Weiliang said that the reasonable pricing mechanism of market-oriented legalized debt-to-equity swap should be further improved. On the premise of effectively preventing the loss of state-owned assets, we should improve the methods of due diligence and exemption of state-owned enterprises and implementing institutions, and further improve the market-oriented level of asset transfer pricing of state-owned enterprises. As long as it complies with the law and fulfills its legal responsibilities according to the procedure, the corresponding exemption clauses should be implemented for losses that have been objectively formed before decision-making or may be caused by market factors. Through these mechanisms to achieve rapid decision-making, timely trading.

In addition, Lian Weiliang said that the converted price of listed companies can refer to the price of the secondary market, and the converted price of non-listed companies can refer to competitive quotations or other fair prices. In addition, we will promote all kinds of property rights trading places to provide transaction pricing services for debt-to-equity swaps, so as to better form a competitive market.

According to the senior business manager of the asset management company, most of the debt-to-equity swap projects have been completed through one-to-one negotiations, and there are few participating institutions, which make it difficult to form market pricing. Market-oriented debt-to-equity swap is still a highly leveraged enterprise with temporary difficulties, which is not suitable for large-scale and extensive development.

Source: Yang Qian_NF4425, Responsible Editor of Economic Report in the 21st Century