Debt-to-Equity Swaps Involving 'Fake Equity' Are Unacceptable, CPPCC Committee Member Says
Yicai Global
/SOURCE : Yicai
Debt-to-Equity Swaps Involving 'Fake Equity' Are Unacceptable, CPPCC Committee Member Says

(Yicai Global) March 2 -- 'Fake equity' should not be allowed in debt-to-equity swaps, said Chinese People's Political Consultative Conference member Mei Xingbao.

Slow-paced, small-scale swaps are acceptable, Mei told Yicai Global in an interview yesterday. A current member of the 11th National Committee of the CPPCC, Mei was an external supervisor at Bank of China Ltd. and president of China Orient Asset Management Corp.

'Fake equity' is a common investment practice of financial institutions in the trust, asset management and private equity businesses, largely in the area of real estate. But the structure of the equity financing changes it into a more debt-like agreement.

The state assets regulator approved the country's first debt-to-equity swap last October, just days after the cabinet gave the green light to the policy of paying off corporate debt through the private placements of shares. Insiders expect listed firms to be the first to make use of two new policies on deleveraging and debt-to-equity swaps.

Mei said the existence of 'fake equity' has its own background. First, financial institutions have higher requirements for the return on costs of funds, and some requirements for the recovery period. When the target company of a debt-to-equity swap is pessimistic about the future, it can only resort to private agreements.

That means the conditions for a swap are not yet in place, or broader "investment attraction" will be needed. In this case, the government is required to roll out uniform guiding opinions for the debt-to-equity swap policy, and it is clearly prescribed that "private agreements" are not allowed.

He also suggests that the costs of funds are a concern in the debt-to-equity swap participated by asset management companies. Unlike banks, AMCs face a greater burden in investing a huge amount of money to purchase creditor's rights. It has been suggested that the central bank provide them with re-lending privileges. With capital costs lowered, they could enjoy more preferential prices in negotiation with companies.

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