(Yicai Global) Aug. 9 -- Ailing Chinese coal companies are seeking to lower their financing costs through debt reorganization. All bank loans owed by the seven major coal companies in Shanxi province -- which total over USD60 billion (CNY400 billion) -- will upgrade to long-term special loans. The seven include Datong Coal Mine Group, China's third-largest coal producer, and Shanxi Coking Coal Group, the nation's biggest coking coal producer. China's largest coal-mining province, Shanxi holds a third of China's total coal deposits, and has more coal companies than any other. Its annual production exceeds 300 million metric tons. From 2014, however, coal companies have seen an ongoing decline in earnings from the economic slowdown, excess production capacity and falling demand. By the end of 2015, the seven major coal companies had an asset/liability ratio of 82.30 percent, significantly higher than the 70 percent bank threshold. At a meeting aimed at wooing bank support for coal groups to aid in solving overcapacity and business restructuring. Zhang Anshun, chief director of the Shanxi Branch of the China Banking Regulatory Commission, said the seven coal groups in the province were free of non-performing loans or principal or interest arrears.
All leading Chinese banks started granting loan extensions to coal companies in the first half of 2016. Shanxi Coking Coal Group in particular will have its short-term loans and financial products of CNY12.95 billion upgraded to long-term special loans upon maturation. Upgrading to long-term loans will cause financial costs to drop, ensuring the safety of their funding chains, while steady financial operations will also help stabilize business performance. Shanxi moreover recently instituted a raft of measures to boost coal market liquidity, e.g. a system of credit default swaps (CDSs) will attract more financial support. CDSs are a popular basic credit derivative tool that allows investors to buy insurance for debts they hold, and which can be compensated via the derivative tool if in default.
Yet these firms' financial woes are only likely to worsen as future demand for coal plummets and China transits to cleaner new energy sources. "Warnings about China's overcapacity crisis are coming in left, right and center, and yet the rate at which new coal power plants are being approved is increasing. These plants do nothing but fuel the overcapacity crisis and add huge debt burdens," said Lauri Myllyvirta, a senior global coal campaigner at Greenpeace, as reported by the New York Times.