Big Banks Grab Approval to Establish Debt-for-Equity Vehicles

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Three of China’s big state-owned banks have obtained approval from regulators for the establishment of new vehicles slated to invest in debt-for-equity swaps.

The China Banking Regulatory Commission announced last month that it gave the green light to Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China to raise fund for the establishment of new investment subsidiaries.

CBRC said that the operations of the new vehicles, which are referred to as “financial asset investment companies,”  would come under its strict guidance and scrutiny.

Multiple sources speaking to Caixin claim that the new investment companies are in fact the debt-for-equity swap funds that Bank of China ABC, CCB and ICBC had all applied to establish at the end of last year, and were previously referred to as “asset management companies.”

The change in the naming of the approved investment vehicles from “financial asset investment companies” to “asset management companies” has raised eyebrows in Chinese financial circles.

One observer points to a “deliberate” lack of clarity in handling of the matter, and ongoing uncertainty as to whether CBRC will require application for an investment or an asset management license.

Others argue that the reason for the name change is that authorities have yet to complete new or consistent regulations governing debt-for-equity swap investment vehicles, and that the People’s Bank of China is still in the process of consulting with other government departments as well as market players on new drafts of asset management guidance opinions.

Areas of consideration for regulators are believed to include encouraging financial institutions to participate in debt-for-equity swap programs via asset management products, thus supporting transitions in China’s economic model and corporate deleveraging.

PBOC is reportedly focused on the eventual establishment of an asset management market in China, and is concerned that the inclusion of debt-for-equity swap provisions that are based on short-term concerns of government policy could have adverse implications over the long-term.

Premier Li Keqiang first mooted the use of debt-for-equity swaps in March 2016, as a means of rescuing China’s “zombie,” companies by cutting down on their debt and passing it on to fresh investors in the form of converted equity.

Not long afterwards a senior figure from one of China’s big banks revealed that lenders would perhaps be allowed to establish new asset management companies and equity investment funds to directly take on bank debts.

In October 2016 the State Council released its “Guidance Opinions on Marketised Bank Debt-for-Equity Swaps,” which fully support the use of qualified subsidiaries by banks to engage in debt-for-equity swap operations.

Market observers have nonetheless expressed concerns that the converted equity may still just be debt in disguise, and that debt-for-equity swaps may actually be a way of covertly increasing leverage as opposed to deleveraging.

In response to concerns about the misuse of debt-for-equity swaps, CBRC announced earlier this year that it would make haste to formulate new administrative measures for trials of debt-for-equity swap implementation agencies, and strengthen supervision of the conduct of participating entities.

 

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