Steel Zombies Resist Government Debt-for-Equity Drive
Yicai Global
/SOURCE : Yicai
Steel Zombies Resist Government Debt-for-Equity Drive

(Yicai Global) Aug. 10 -- The government is pushing for debt-for-equity swaps among steel companies to help ease their debt pressure and improve their financing conditions, insiders have told Yicai Global. However, many zombie businesses are reluctant to swap equity for debt.

China's steel industry has a debt-to-asset ratio of between 60 percent and 70 percent, well above that of other industries, public data shows.

Zombie businesses are unlikely to get directly involved in debt-for-equity swaps, Mr. Huang Wentao, strategist at CITIC Securities, said. In the absence of a mandatory bankruptcy mechanism, zombie businesses are not willing to convert debt into equity. Once steel prices rebound, zombie businesses will immediately resume production.

"The root cause of heavy losses in the Chinese steel sector is that it is difficult to cut valid steel capacity," a representative at the Metallurgical Mines Association of China told Yicai Global. "Zombie businesses are a major contributor to that."

For most listed steelmakers, getting their bank loans renewed or borrowing new loans to repay old ones is not a big problem as the majority of them are state companies. However, they face relatively big debt pressure as borrowing costs are high, Mr. Huang Qizhi, researcher at Northeast Securities, told Yicai Global.

Debt-for-equity swaps mainly target bank loans. Bonds are unlikely to be converted into equity due to high costs and coordination difficulties, a CITIC Securities report pointed. Debt-for-equity swaps are difficult to implement due to high costs. These costs would most likely be borne by banks rather than government finances.

Debt risks are likely to become the main challenge for reducing capacity. It is essential that local social stability is not compromised and that systemic and regional financial risk is minimized, Mr. Xue Hexiang, chief strategist at Huatai Securities, said.

Dongbei Special Steel Group Co., which has defaulted seven times in four months, came under pressure recently to promise its creditors that it will not evade its financial obligations and will not conduct debt-for-equity swaps.

Zombie businesses are indebted companies with no hope of regaining vitality but staying alive only with support from the government or lenders. They are characterized by a long-term dependence on external aid.

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