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China Construction Bank to set up debt restructuring fund with Wuhan Steel
October 12, 2016 / 2:02 AM / a year ago

China Construction Bank to set up debt restructuring fund with Wuhan Steel

SHANGHAI, Oct 12 (Reuters) - China Construction Bank Corp will establish a 24 billion yuan ($3.60 billion) transformation and development fund with Wuhan Iron and Steel Group Corp to help the steel firm reduce leverage, the bank said on its website.

The funding programme, which the bank said was the first of its kind which it was participating in with a central government administered state-owned enterprise, has already received its first injection of 12 billion yuan according to the statement.

Although the statement released on Tuesday did not explicitly mention debt-to-equity swaps, a separate article published Wednesday by official media China Daily said the reduction in leverage would be accomplished mainly through such swaps.

A China Construction Bank representative had no immediate comment when reached by telephone.

On Monday evening the State Council, China’s cabinet, released long-awaited guidelines for debt-to-equity swaps, mooted as one solution to China’s enormous corporate debt overhang.

Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP), according to the most recent figures from the Bank for International Settlements.

In a news briefing, a high-level official warned the swaps are not a “free lunch” for troubled companies, adding that loss-making “zombie” firms are strictly forbidden from such exchanges, which will be used mainly to help high-quality firms that face temporary difficulties.

International institutions have warned Beijing to stop financing weak firms, especially inefficient state-owned enterprises, which tend to crowd out the private sector.

The government will take a multi-pronged approach to cutting company debt, including encouraging mergers and acquisitions, bankruptcies, debt-to-equity swaps and debt securitisation, according to the guidelines.

The debt-to-assets ratio of Wuhan Iron and Steel reached 76 percent at the end of 2015 according to China Daily. The paper said China Construction Bank is aiming to help lower that ratio to about 65 percent, citing comments by Zhang Minghe, head of China Construction Bank’s debt-to-equity swap programme.

Wuhan Iron and Steel is in the midst of a merger with its larger rival Baoshan Iron and Steel which will create the world’s second-largest steel producer.

$1 = 6.6685 Chinese yuan renminbi Reporting by Nathaniel Taplin and Winni Zhou; Editing by Stephen Coates

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