Commercial debt dodgers pressure China’s banks

May 26, 2016 10:25 AM (UTC+8)

 

Banks are trying to cope with a sharp rise in loan defaults tied to state and private companies that creatively sidestep debt obligations

(From Caixin Online)

By staff reporters Wu Hongyuran and Zhang Yuzhe

Bankers nationwide are rushing to call loans issued to state-owned and private companies to avoid a rising tide of debt dodging that’s not only legal but often supported by the government.

A worker checks steel coil at state-owned Donghai Special Steel Group facility. The company defaulted on 700 million yuan worth of debt earlier in May.
A worker checks steel coil at state-owned Donghai Special Steel Group facility. The company defaulted on 700 million yuan worth of debt earlier in May.

Some companies in the past year have frustrated creditors by declaring bankruptcy, while companies in the steel manufacturing and coal mining industries have used asset restructuring projects to avoid debt obligations.

“Many companies are using bankruptcy and asset restructuring as measures to skip out on bank loan repayments,” said a source at a bank who asked not to be named.

Bankers are struggling to cope as bad debts mount. The total value of loans in default reported by the nation’s banks at the end of 2015 surged nearly 48 percent year-on-year to 1.19 trillion yuan, according to a source close to the China Banking Regulatory Commission. The overall default rate for China’s banks rose about a half-percentage point during that period to 1.8 percent.

A poster child for the toxic loan trend is state-owned China Railway Materials Co. (CRM), the nation’s largest supplier of iron rail tracks and other railroad building wares. On April 1, sources told Caixin, the company owed creditors 56 billion yuan. Its debt included 18 billion yuan in bank loans and 16.8 billion yuan worth of bonds.

A few days later, citing trouble repaying creditors, the company intervened in the bond market by suspending trades on all of its outstanding bonds.

Market concerns over the CRM suspension eased May 17 when the company paid off holders of bonds worth 1 billion yuan. But trading did not immediately resume for the rest of the bonds, and the company issued a warning through Shanghai Clearing House about possible bond defaults.

CRM’s crisis was the subject of an early April meeting between officials from 19 banks and the central government’s State-owned Assets Supervision and Administration Commission (SASAC), which oversees CRM and other major state companies.

Sources close to the company said bankers raised objections over an SASAC debt-equity swap proposal that called for banks to receive stakes in CRM in exchange for forgiving half of the company’s loans.

SASAC later announced that CRM would be taken over and its debt restructured by China Chengtong Holdings Group Ltd., a central government-backed asset management and investment company.

Yet the government decision may have further aggravated bankers since, according to a banking industry expert who declined to be identified, in China banks typically receive less than 20 percent of what’s owed whenever a company launches a debt restructuring. Read more

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