CCB sets up debt-to-eq­uity swap to re­duce Yun­nan Tin’s lever­age

China Daily (USA) - - BUSINESS - By JIANG XUEQING jiangx­ue­qing@chi­

China Con­struc­tion Bank Corp signed a nearly 5-bil­lion-yuan ($742 mil­lion) in­vest­ment agree­ment on a mar­ket-driven debt-for-eq­uity swap pro­gram with Yun­nan Tin Group Co Ltd on Sun­day, to help the com­pany re­duce its lever­age.

The 5-bil­lion-yuan in­vest­ment is part of a two-phase, five-year debt­for-eq­uity swap pro­gram with an ex­pected rate of re­turn rang­ing from 5 per­cent to 15 per­cent. Al­to­gether, the bank will raise so­cial cap­i­tal worth a to­tal of 10 bil­lion yuan for the pro­gram.

Cur­rently, the to­tal as­sets of Yun­nan Tin Group ex­ceed 50 bil­lion yuan, and the to­tal li­a­bil­i­ties are 35 bil­lion yuan. Zhang Tao, chair­man of the group, said the swap aims to help the Chi­nese tin pro­ducer and ex­porter out of its present cycli­cal fi­nan­cial dif­fi­cul­ties.

Pre­vi­ously, the group shifted its in­vest­ment from tin pro­duc­tion to other busi­ness seg­ments, such as real es­tate, thus bring­ing huge cap­i­tal pres­sure on the com­pany. More­over, the fall­ing prices of non­fer­rous met­als since the end of 2012 also tight­ened its cap­i­tal chain, he said.

Zhang Minghe, head of CCB’s debt-for-eq­uity swap pro­grams, said the bank hopes to help the group lower its debt-to-as­set ra­tio by 15 per­cent­age points from 83 per­cent through the 10-bil­lion-yuan debt-for-eq­uity swap pro­gram.

CCB will set up a fund jointly with Yun­nan Tin Group to raise money for the pro­gram from the mar­ket and a small amount of the fund’s orig­i­nal cap­i­tal will come from the bank.

At present, CCB is car­ry­ing out debt-for-eq­uity swaps by set­ting up funds. Like many other com­mer­cial banks, it is also seek­ing to set up its own in­vest­ment man­age­ment com­pany.

“We’ll ac­tively ap­ply for reg­u­la­tory ap­proval for our es­tab­lish­ment of an in­vest­ment man­age­ment com­pany,” Zhang said. “Com­pared with com­mer­cial banks, such com­pa­nies will have dif­fer­ent skills and higher op­er­a­tional ef­fi­ciency and will be more pro­fes­sional in man­ag­ing in­vest­ment port­fo­lios. This will pro­vide an op­por­tu­nity for the trans­for­ma­tion and de­vel­op­ment of com­mer­cial banks.”

An­a­lysts at Guo­tai Ju­nan Se­cu­ri­ties Co Ltd said in a re­search note that if banks sell non­per­form­ing loans to third-party in­sti­tu­tions like as­set man­age­ment com­pa­nies, it will iso­late po­ten­tial risks from the banks’ ex­ist­ing busi­ness, but banks have to sell NPLs at a fairly large dis­count and can­not en­joy sub­se­quent earn­ings after the debts are swapped for equities. How­ever, these prob­lems will be avoided if banks trans­fer bad as­sets to their own sub­sidiaries, which will in­crease their en­thu­si­asm in push­ing for­ward debt-for-eq­uity swaps.

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