China Bad Bank Units Hasten Bond Sales to Take On Toxic Debt
China Bad Bank Units Hasten Bond Sales to Take On Toxic Debt
(Bloomberg) -- Bad bank units of China’s biggest state-owned lenders are racing to sell yuan-denominated bonds as they gear up to take on mounting piles of soured debt.
Agricultural Bank of China Co.’s asset management arm priced a 6 billion yuan ($846 million) bond on Friday for the first time, while Industrial and Commercial Bank of China Co.’s unit plans to sell a 10 billion yuan note in October after issuing a similar amount in March. China Construction Bank Corp.’s unit sold 10 billion yuan of notes in August.
Bond issuance has become a priority for these bank-owned asset management companies seeking to diversify their funding and shift the financing burden from parent lenders. Such a market-oriented approach gives them greater flexibility and financial firepower to buy soured loans and conduct more debt-equity swaps. Chinese banks’ outstanding bad loans hit a record 2.2 trillion yuan as of June.
“Selling bonds is in line with what regulators are asking them to do, empowering them to expand their strength to do more debt-for-equity swaps or buy more distressed debt,” said Richard Zhang, Shanghai-based partner of financial advisory services at EY. As more such swap deals are being implemented, such bank-owned AMCs are seeking more market-oriented way of raising funds, he said.
China’s regulators gave major state-owned banks the green light in 2017 to set up their own asset management units to buy debt including soured loans from peer banks, which would be swapped it into equity and then sold off. The move was intended to help cut corporate leverage in the country.
The bank-owned units have implemented 254 debt-for-equity swap deals as of June 5, totaling 400 billion yuan, according to data from the Chinese Banking and Insurance Regulatory Commission.
Agricultural Bank of China’s unit has carried out 70 billion yuan of swaps as of March. Most of the distressed debt was purchased from its parent lender, it said in a Sept. 10 bond prospectus. ICBC’s unit undertook 50 billion yuan of such deals as of June, according to company filings.
China Construction Bank’s unit will focus on companies with better-quality assets, including those with “temporary troubles”, according to a bond prospectus dated Aug. 14. It will actively buy distressed debt and swap it into equity stakes so as to cut financial risks, it said.
Bank units need more cheap funding with longer-tenor to do debt-for-equity swaps, and bond financing would naturally become their main funding source, said May Hu, partner of turnaround and restructuring services at KPMG LLP. They will selectively buy some distressed debt, including bad loans from smaller banks, she said.
To contact Bloomberg News staff for this story: Tongjian Dong in Shanghai at tdong28@bloomberg.net;Wenjin Lv in Shanghai at wlv8@bloomberg.net;Zheng Li in Shanghai at zli698@bloomberg.net
To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin
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With assistance from Bloomberg