More Chinese banks are setting up their own bad-loan asset management companies to facilitate the country’s debt for equity swap scheme that aims to reduce China’s corporate leverage.
China Construction Bank, the second largest lender in the country, is planning to apply for a license to set up its own bad-loan asset management company (AMC) to focus on debt for equity swap initiatives, Zhang Minghe, the bank’s executive for the debt for equity scheme, said earlier this week.
Compared with other asset management companies CCB currently owns, including CCB International, CCB Trust Co and CCB Principal Capital Management Co, the new AMC will focus on debt for equity swaps, said Zhang.
“We want to have independent implementing agencies for debt for equity schemes and our peers also have the same idea,” he said.
China Minsheng Banking Corp is also reported to have plans for a bad-loan AMC to offload some of its US$5.7 billion of bad loans.
Minsheng Bank is seeking guidance from the banking regulator on establishing such an entity, including details on its potential business scope and ownership structure, according to media reports.
The two banks are endeavouring to enter a bad-asset management market that has been dominated by four big AMCs – China Huarong, Cinda, Orient and Great Wall – that the government established in 1999 to help clean up bad loans in the banking system. With the economic slowdown, China’s banks once again find themselves under pressure from mounting bad debts.
The moves by the two banks were prompted by new guidelines on debt for equity swaps released by the State Council earlier this month as part of a strategy to reduce the country’s alarmingly high corporate sector debt.
The guidelines prevent banks from directly swapping their non-performing loans. Instead, they will need to transfer loans to qualified implementing agencies, which will then convert the loans into equity. Banks are permitted to set up new facilities, which are expected to raise funding from external investors to support the swaps.
Analysts said while the approach could help speed up implementation of the scheme, it raises doubts over the increased risks.
“If banks implement the debt for equity swap via their own AMCs or other subsidiaries, negotiations could be simpler and faster and they don’t have to worry about funding too much,” said Liao Qiang, a senior director for financial institution ratings at Standard Poor’s.
“I expect more banks to follow suit, as long as policymakers do not issue any warnings on the related risks, as it could make the banks’ balance sheets look healthier, and more importantly, it’s the politically right thing for Chinese banks to do,” said Liao.
However, in a recent report Fitch Ratings warned of the risk of “lack of transparency in the relationships between the parties involved” and that “banks could use related parties as implementing agencies”.
“The fact that the bank plans to raise capital through wealth management products (WMPs) also raises concerns over whether the bank remains exposed to the debts through providing implicit financial support to the WMPs, as Chinese banks normally do for their WMPs,” said Liao.
The ratings agency said that because debt-to-equity swaps are now allowed to be funded by “social capital” – likely to include mutual funds and WMPs – it raises the possibility of banks retaining their exposure to corporates through complicated ownership and transaction structures that lack transparency.
For example, banks’ exposure to troubled companies might simply move off-balance sheet if bank-linked WMPs are used to fund swaps, said Fitch.