SHANGHAI/HONG KONG (Reuters) - Creditors of Chongqing Iron & Steel Co have voted to accept a debt-for-equity swap plan to restructure nearly 40 billion yuan ($6.04 billion) in debts, sources with knowledge of the matter told Reuters on Friday, giving the state-owned enterprise some reprieve as debt-servicing costs rise.
As China steps up its campaign to reduce financial risk, more state-owned enterprises may be forced to restructure debts, with “non-systemic” local SOEs expected to face more financial strain in the months ahead, some analysts say.
Chongqing Steel’s debt plan will see the company pay in cash portions of claims up to and including 500,000 yuan, and issue new shares for the portions of claims exceeding that level. In a sign of their eagerness to reclaim money, lenders will receive new shares at 3.68 yuan per share, a 71 percent premium to their last traded price in Shanghai. The shares, to be issued before the end of the year, will not be subject to a lock-up period, a source said.
Trading of Chongqing Steel’s Shanghai-listed A-shares has been suspended since Aug. 1. The company’s Hong Kong-listed H-shares closed down 0.6 percent at HK$1.68 on Friday. Lenders to the steelmaker welcomed the approval of the swap.
“We’re at the back of the line behind the banks and so on, so speaking for myself this is a relatively good outcome,” said a creditor who asked not to be named because of sensitive business relationships.
China unveiled guidelines last year to reduce rising corporate debt, including encouraging debt-for-equity swaps. Total corporate debt amounted to 166.3 percent of China’s GDP in 2016, according to the Bank for International Settlements.
As of Sept. 22, 77 companies in China had conducted debt-for-equity swaps worth more than 1.3 trillion yuan.
Chongqing Steel, a once-high-flying regional steelmaker with investments in overseas iron ore mines, posted heavy losses in 2015 and 2016, citing an economic downturn, severe industrial overcapacity, soaring labor costs and persistently low steel prices.
While rising raw material prices have helped some SOEs, companies have also faced sharp rises in debt-servicing costs.
Corporate debt yields have tracked higher yields on Chinese government debt. The 10-year treasury bond yield rose to a three-year high of 4.01 percent this week, as institutions sold off the highly liquid securities to boost their cash positions amid fears of a stronger regulator crackdown on risky financing.
The yield on benchmark AAA five-year corporate debt was at 5.079 percent on Friday, up more than 86 basis points from the beginning of the year.
Jean-Charles Sambor, deputy head of emerging market debt at BNP Paribas Asset Management, said he expects “non-systemic” local SOEs to come under more pressure in the coming months.
“Some of these issuers could now experience significant re-pricing as China continues to open up its financial markets to international standards and curbs excessive borrowing under President Xi Jinping’s reformist agenda,” he said.
“We expect Chinese policymakers to gradually inject more credit risk in the system via less support for non-systemic SOEs.”
($1 = 6.6265 Chinese yuan)
Editing by Jacqueline Wong