Chinese Banking Regulator Bans Debt-For-Equity Swaps by Zombie Companies
Xu Wei
/SOURCE : Yicai
Chinese Banking Regulator Bans Debt-For-Equity Swaps by Zombie Companies

(Yicai Global) Aug. 9 -- The China Banking Regulatory Commission has drafted a measure to ban zombie firms, businesses acting in bad faith and companies engaged in industries suffering overcapacity from carrying out debt-for-equity deals.

When implementing a debt-for-equity swap, a commercial bank should contribute at least 50 percent of the total capital, the commission said on Aug. 7.

For debt restructuring, authorities will give priority to high-quality companies with strong growth potential, including firms affected by cyclical industry fluctuations and those capable of staging a turnaround in fortunes.

The CBRC will also favor debt restructuring for high-growth but heavily indebted enterprises, especially those from emerging strategic industries, key enterprises with the highest debt ratios in industries suffering overcapacity, and strategic enterprises that may affect national security.

When a bank conducts a debt-for-equity swap via an implementation entity, it should transfer debts to the entity first, and the entity can then convert the debts into equity in the target company, the regulator stated. The bank may not swap any debts for equity directly without central government approval.

CBRC has also confirmed the eligibility criteria for commercial banks proposing new debt-for-equity swaps, which had been a recent concern in the banking market.

The main capital contributor to the entity swap should be served by a commercial bank registered and incorporated in China, the draft measures state. The CBRC define the main capital contributor as the largest shareholder in the entity, whose capital contribution should be no less than 50 percent of the total capital base. Banks should include the entities in their consolidated financial statements.

An enterprise may not carry out a debt-for-equity swap if it has obvious defects in governance structure or mechanisms, if its equity ownership is very complicated and lacks transparency, or if it does not have a clearly defined core business. Firms with excessively extensive business lines will also be ineligible.

Other kinds of companies unable to carry out swaps include those with cash flows susceptible to changes in the economic climate and those with asset-liability ratios and financial leverage significantly higher than the industry average.

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Keywords: Debt-To-Equity , Regulator