New Guidance Seen Likely Speeding Up Debt-For-Equity Swaps

     BEIJING (MNI) - The China Banking Regulatory Commission's publishing of

guidance on debt-for-equity swaps is expected to accelerate their launch and

significantly move China along in its financial deleveraging campaign.

     "So far the total scale of signed and agreed debt-for-equity swap projects

has reached almost a trillion yuan," Liao Zhiming, an analyst at Tianfeng

Securities, said in a note on Monday. "But with a lack of clear regulations on

the matter, launching projects have only totaled no more than 100 billion yuan."

     "The publishing of the guidance makes the regulations much clearer, and the

launching of new debt-for-equity swap projects will become faster," Liao said.

     Debt-for-equity swaps were introduced by the government as a way to

efficiently deleverage China's economy, and the State Council first published

guidance on debt-for-equity swaps in October. The CBRC guidance is the most

recent effort to push the process forward.

     The guidance published Monday said that banks shall not directly conduct

debt-for-equity swaps; they need to establish a subsidiary first in order to

isolate the banks from potential risks. Other qualified non-bank financial

institutions can also take part in the establishment of joint-stock

institutions, but more than 50% of the shares of the company are required to be

owned by banks.

     Newly established debt-for-equity swap institutions can be funded by

issuing bonds and through the interbank market, the guidance said. The

institutions can also apply to become private funds, and then seek funding from

investors.

     The guidance said the debt-for-equity swaps should only target companies

with a "positive outlook" and the ability to tackle temporary financial

difficulties. Also, enterprises whose impact on China's national security is

significant, and "leaders" in industries with excess capacity could also be the

entities to conduct debt-for-equity swaps, the guidance said.

     Certain companies, including "zombie companies," companies with a bad

credit records, companies that have complex debt relationships and companies

with entrenched over-capacity problems cannot be the targets of debt-for-equity

swaps, according to the guidance.

     The guidance also said the debt-for-equity swap institution cannot accept

funding from the original banks, and the banks shall not undertake any

obligations for bad debts. In other words, the debt-for-equity swap institutions

shall not help banks to avoid regulators by moving non-performing loans out of

their balance sheets while still, in fact, holding onto those NPLs.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

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