Banks Banks setting setting up up own distressed distressed asset asset arms for debt-to-equity swaps management arms

Strategy is to shift away from profits based on rate spreads Move is part of business strategy shift away from profits based on interest rate spreads

China’s five largest Stateowned commercial banks are planning to set up their own asset management subsidiaries to carry out debt-to-equity swap China’s programs,five largestsaid people Stateownedcommercial with knowledge of the banks matter. are planning Agriculturalto set up Banktheir ownof China assetmanagementsubsidiariesLtd announced on Tuesdayto carry its out board debt-to-equityof directors swap approved programs, the said proposal people to with establish knowledgea whollyof the owned matter. subsidiary, ABC Asset Management AgriculturalCo, in Bank Beijing of with China a total Ltd capital announced contributionon Tuesdayof 10 billionits yuan board ($1.45of directorsbillion). approvedABC Asset the will proposal specialize to in establishthe debt-to-equitya wholly ownedswap business, subsidiary, includingABC Asset acquisition Management of debt Co, assets,in Beijing converting with a total debt capitalinto equity, contributionholding, managingof 10 billion and yuan disposing($1.45 billion).of equity in debt-to-equity swap enterprises ABCAsset and will other specialize financial in the debt-to-equitybusiness, accordingswap business,to the announcement.including acquisition of debt The assets, investment, converting which debt will into be equity, funded holding,by ABC’s managingown capital, and disposing“meets theof equity bank’s in needs debt-to-equityto adapt swapto changes enterprises in the internaland other and financialexternal business, economic accordingand financialto the environment”. announcement.

“It The will investment,enable the which bank willto enhance its competitiveness and gradually transform its business model from overreliance on the deposit and loan business and to carry out integrated operations,” the bank said.

Zhang Minghe, who leads the debt-to-equity swap business of China Construction Bank Corp, said CCB is seeking to set up its own investment Zhang Minghe, official of CCB management company and will actively apply for regulatory approval.

“As far as we know, all five of the large State-owned commercial Bank banks Corp, are said thinkingCCB is alike. seeking Each to is set consideringup its own establishing investment a subsidiary management with companya registered and capitalwill activelyof 10 billion apply yuan. for The regulatoryfinal result approval.will depend on the “As resolutionfar as we of know,the boardall fiveof directors,”of the largehe said. State-owned commercial“We commercialbanks are banks thinking regard alike. this Eachas an is opportunity considering to establishingtransform our a business,” subsidiaryhe added.with a registered capital of 10 billion After yuan.the subsidiariesThe final resultare established,will depend on they the will resolutionraise fundsof the for board debt-to-equityof directors,” swaps he from said. qualified institutional and individual“We commercialinvestors. banks

The sources of money will include insurance funds, pension funds and industrial investment funds that can make long-term investments.

“By setting up a subsidiary, we’ll have a professional team specializing in debt-toequity swaps. Moreover, it will be easier for the subsidiary, as a legal entity, to isolate risks from the bank,”

Zhang Minghe,

Zhang said. equity According swaps. to Moreover,the State it Council’swill be easier guidelines,for the subsidiary,banks are onlyas a legal allowed entity, to to transfer isolate debtsrisks to from implementingthe bank,” Zhangagencies, said. including financial asset managementAccording to companies,the State insuranceCouncil’s guidelines,asset managers, banks andare only newly allowed establishedto transferbank subsidiaries.debts to implementingThe implementing agencies, agencies including will financialthen turn asset the managementdebts into the companies,equity of target insurance companies.asset managers, and Comparednewly establishedwith choosing bank a subsidiaries. third-party The implementing implementing agency, agencies bankswill thenwill have turn advantagesthe debts into by the setting equity up of their target own companies. subsidiaries with the Compared investment with function, choosing said a Lou third-party Wenlong, vice-president implementing of agency, Agricultural banks Bank will of haveChina, advantagesin an article by publishedsetting upin 21st their Centuryown subsidiariesBusiness Herald with last the month. investment function, said Lou “First, Wenlong, banks vice-presidenthave a better of Agricultural understanding Bank of of target China, companiesin an article than published third-party in implementing21st Century BusinessHeraldagencies, it will last month.be more efficient and smooth “First, to banksgo throughhave a betterthe procedures understandingof of commercialtarget companies negotiations, than due third-partydiligence and implementing valuation for agencies, debt-toequity it will be swaps.” more efficient and smooth “Second,to go the through sources theof funds procedureswill be of more commercialdiverse and negotiations,secure becausedue diligencebanks can and make valuation full for use debt-to-eqof their own capital or raise funds from asset management products and bond issuance.”

“Finally, banks will benefit from potential earnings of target companies after their businesses take a turn for the better, which will offset possible financial losses caused by transfers of debts to thirdparty implementing agencies at huge discounts,” he said.

We commercial banks regard this as an opportunity to We transform commercial our business.”banks regard this as an opportunity to transform our business.” official of CCB