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October, 25, 2016

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Debt-equity swap's impact in focus

Allowing a large number of companies to convert debt into equity would help not only enterprises with huge borrowings on their books but lenders, analysts said.

For that to happen, however, more clarity on the eligibility criteria for the debt-to-equity swap scheme is needed, they said.

A large number of participants would make the whole process less risky. Besides, it would limit any potential adverse impact on the stock markets, and help allay investors' concerns over feared risk of defaults, they further said.

An Oct 10 circular by the State Council detailed the regulations concerning the debt-to-equity swap scheme. The so-called "zombie" enterprises are not allowed to convert their debt into equity.

On the other hand, lenders and institutions that offered loans to corporates, including insurers, State-owned capital investment companies and asset management companies, can agree to accept equity corresponding to their loans. Private investors are also encouraged to participate in such swaps, the circular said.

"This will likely send a strong signal that the debt-to-equity swap plan will be market-oriented, investment-like, and not a procedure imposed on lenders to force them to bear all the risks. Bad debts ought not to become bad equity," said Luo Qinyuan, manager of Shanghai-based Kunyuan Asset Management Ltd.

Nuanced regulations would also help allay investors' concern that the collective corporate debt, estimated at 1 trillion yuan ($149.3 billion), could flood the A-share market in the form of post-swap equity, adversely impacting the stock markets, said Luo.

"The measures (to reduce corporate debt) come against the background of proactive fiscal policy and prudent monetary policy, indicating that ample policy support will continue, aimed at maintaining GDP growth around the 6.5 percent target," said Marie Diron, a senior vice-president at Moody's Investors Service, a leading credit ratings and risk analysis agency.

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