Chinese banks to launch debt-for-equity swap funds

The National Development & Reform Commission (NDRC) and six other regulatory agencies said in a joint statement that banks can sell wealth management products to individuals and institutional investors and invest the proceeds in funds set up to convert debt into equity. These vehicles will be managed by asset management corporations (AMCs) originally established to help banks dispose of their non-performing loans (NPLs).

The AMCs will, in turn, be encouraged to launch debt-for-equity swap funds with independent private equity managers and domestic corporates. Under the new guidelines, qualified listed and unlisted enterprises can participate in swap schemes by issuing common shares, preference shares or convertible bonds to the AMCs.

China's banking system is said to be carrying anything between $1 trillion and $3 trillion in NPLs. The severity of the problem has prompted regulators to accelerate the process of shifting bad debts off banks' balance sheets, including transferring NPLs to AMCs for resolution or sale to third-party investors, securitization, and debt-for-equity swaps.

Debt-for-equity swaps were employed in the late 1990s and early 2000s with AMCs as the counterparties. The next generation of swaps are intended to be brokered by banks and feature third-party investors. However, several deals completed in 2016 saw debt sold to investors at face value before being converted into equity, with the target company obliged to buy back the equity at a later date if certain performance targets aren’t met.

 

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• Topics
• Greater China
• Regulation
• Restructuring
• Fundraising
• China
• Distress