What is Debt-Equity Swap?

The so-called debt-to-equity swap refers to the establishment of a financial asset management company by the state to acquire the bad assets of a bank, and transform the original debt and debt relationship between the bank and the enterprise into the equity and property relationship between the financial asset management company and the enterprise.

Debt to equity

Debt for Equity Swap

In the sense of reform, the inherent meaning of debt-to-equity swaps actually goes beyond the advancement stipulated by the 15th National Congress of the CPC.

1. Concentrate on solving large and very large national key enterprises that play an important role in economic development;

2. Support enterprises that have undertaken national key projects for more than ten years to reduce their debt burdens, and promote them to reach production and efficiency as soon as possible and upgrade their industries;

3. Focusing on the two major goals of three-year reform and relief of state-owned large and medium-sized backbone enterprises, the qualified enterprises in the loss-making enterprises will be turned around and restructured. The goal of state-owned enterprises in getting out of trouble is arduous, and the debt problem is one of their main obstacles. After the debt-to-equity swap, the company does not have to repay principal and interest, and the burden is reduced;

On December 4, 2018, according to preliminary statistics, the total number of market-oriented debt-to-equity contracted projects reached 226, with funds in place of 458.2 billion yuan, funds in place of 142, and a capital availability rate of 25%. The contracted enterprises are mainly local state-owned enterprises. The number of contracted local state-owned enterprises is 130, and the amount of funds in place reaches 229.1 billion yuan.

Since 2018, the total amount of market-oriented debt-to-equity contracted projects totaled 171.1 billion yuan, and the number of private enterprises participating in debt-to-equity swaps has increased significantly. In 2018, the contracted amount reached 25 billion yuan. ^[2]

It put

The implementation of debt-to-equity swaps is a major measure decided by the State Council to revitalize large and medium-sized state-owned enterprises and achieve three-year state-owned enterprises' relief. On September 2, 1999, China Cinda Asset Management Co., Ltd. and Beijing Construction Materials Group jointly signed a debt-to-equity agreement for Beijing Cement Plant. Beijing Cement Plant also became China's first debt-to-equity pilot enterprise.

Beijing Cement Plant is a large state-owned backbone enterprise with a daily output of 2,000 tons of cement. However, in the past, during the investment construction period, the plant had loaned 510 million yuan to the Construction Bank. By the end of 1998, the total principal and interest had reached 968 million yuan. The heavy debt burden makes the production and operation of this factory face serious difficulties.

In March 1999, the State Council approved the establishment of China Cinda Asset Management Corporation to divest and dispose of non-performing assets of the bank, and to promote the pilot work of state-owned enterprise reform. After the establishment of Cinda, the credit-to-equity swap was taken as the focus of work. Through the implementation of debt-to-equity swap, efforts were made to revitalize bad assets. At the same time, large and medium-sized state-owned loss-making enterprises that implemented credit-to-equity swaps optimized the asset-liability structure, and promoted the establishment of a modern enterprise system. Enterprises turn losses into profits.

Beijing Building Material Group, the parent company of Beijing Cement Plant, conducted friendly negotiations with Cinda Asset Management Corporation on the basis of asset evaluation and corporate financial evaluation of Beijing Cement Plant. Agreements were reached on issues such as repurchases, and a conversion plan was determined.

It is reported that after the implementation of the debt-to-equity swap, the Beijing Cement Plant could achieve a turnaround in 1999. Since 2000, the annual profit can reach more than 20 million yuan. The asset-liability ratio has dropped from 80.1 percent to 32.4 percent. At the same time, through asset divestitures, companies reduce staffing and increase efficiency, and set up a limited liability company with Beijing Construction Materials Group and Cinda Asset Management Corporation as shareholders, establish a modern enterprise system, improve the corporate governance structure of the company, and promote the transformation of the company's operating mechanism. Into a virtuous circle.

Debt to equity

Debt to equity can be implemented

The state has limited the scope of enterprises that can implement debt-to-equity swaps. The reason for the limitation is that first, the country has limited resources available for debt-to-equity swaps. Debt-to-equity swaps require state finance and bank funding to bear some of the bad debt losses, mobilization of capital market funds, and the need for some special preferential policies. These resources are very limited. Second, debt-to-equity swaps should not be widely used. Debt-to-equity swaps may reduce negative corporate debt burdens, induce negative effects such as softening corporate loan constraints, induce debt evasion, and transfer of risks. Therefore, the scope of implementation should not be too large. The enterprises should be those with serious shortage of capital, excessive debt ratio, correct business behavior, and good results after debt-to-equity swaps.

The range of enterprises designated by the state to implement debt-to-equity swaps mainly includes commercial banks and foreign debts that have been built and put into operation since the second half of the 1980s, lack of capital, and state-owned loans for reconstruction. Enterprises with excessive debt losses due to expansion and other large enterprises with important status and great difficulties must have high technological equipment and management level, have market potential, and can turn losses into profits after debt-for-equity conversion. The scope indicates several factors that the country attaches importance to when choosing a debt-to-equity enterprise:

1. Enterprises are built and operated on loans, lacking capital;

2. State key enterprises with important status and great difficulties;

3. The quality of the company's physical assets is excellent, and the operating efficiency is good;

4. The key reasons for corporate losses and non-performing liabilities are excessive debts rather than poor management. Reducing debts by converting corporate debt to equity can be used to turn losses into profits.

Among these several factors, the most basic is the fourth point, which is to emphasize that the bad debts of enterprises are not mainly caused by the company's own operating reasons, but caused by economic system policy defects and other reasons. Non-performing liabilities of enterprises are caused by the defects of economic system policies, and are the basic basis for enterprises to require non-performing liabilities to be resolved by the state and the state to reasonably select debt-to-equity enterprises. Enterprises are built and operated on loans and have insufficient capital. Liability is the most important factor caused by the original macro system.

Debt to equity

Pay attention to the choice of sophisticated equipment and advanced technology. Non-performing debt enterprises with good operating efficiency perform debt-to-equity swaps, and more clearly define that the cause of non-performing debts of enterprises is not due to the poor operating efficiency of the enterprise, but mainly due to the investment decision to establish the enterprise. This kind of bad debt that should not be solved by the enterprise is related to the capital problem. Compared with other factors, there is a problem that it is difficult to distinguish the reasons for the system policies that cause bad debts from the reasons for poor management of enterprises. Such as national focus, important status, large scale, and great difficulties, it mainly reflects the state's policy tilt on large state-owned enterprises, and this policy tilt is most likely to cause investment errors. Loan constraints are softened and operating efficiency is low. Selecting a debt-to-equity enterprise should be based on the cause of non-performing liabilities. The enterprises that can implement debt-to-equity swaps should be those with good operating efficiency and no damage to their real assets. The bad debts of such enterprises are mainly related to the investment decisions and capital utilization of the enterprises at the time of establishment, and have nothing to do with the company's own operations. Repaying loans and paying interest makes it difficult to improve operating efficiency and resolve bad debts. The conditions for the selection of debt-to-equity enterprises determined by the state attach great importance to the institutional causes of non-performing liabilities of enterprises, as well as the need to reduce debt burdens of enterprises, national key project enterprises, and large enterprises with excellent assets and equipment. Many enterprises and departments have put forward debt-to-equity requirements, mainly on the grounds that the company's debt burden is too heavy, to dilute or avoid the cause of the liability of the company's bad debts. Facing the strong tendency of enterprises and some departments to reduce debt burdens without any reason, financial asset management companies should define and explain these issues when choosing debt-to-equity enterprises.

Debt-to-equity SOE reform

Financial asset management companies restructuring and restructuring non-performing debt enterprises by virtue of their holding power not only improves the degree of guarantee for recovery of equity, but also may use this as an opportunity to open up a new path for the reform of state-owned enterprises. In the current situation of severe non-performing liabilities of enterprises, weak debt collection capacity of banks, and the loss of creditor's rights, creditors cannot take further effective measures to recover creditors' rights. Creditors can't put enough pressure on the enterprise, which leads to loosening of the loan repayment constraints. Many companies don't want to turn losses into repayments, and many companies intentionally owe loans. Relevant departments that do not have equity or bond interests have also allowed companies to owe loans and interest, allowing enterprises to benefit from long-term low-cost occupation of loan funds. After the bond is converted into equity, a financial asset management company has the right to take strong measures to supervise or reorganize the enterprise, and replace the company's operating personnel who are unable to turn around and lose morality. Strictly investigate the liability of the company's non-performing liabilities and implement stricter supervision of the company's operations in order to reduce or even eliminate the pressure that the non-performing debt burden of the company may be relieved to reduce the negative effects and adverse selection risks. Enterprises that have been converted into debts due to serious bad debts should not receive free dinners, but should be punished under pressure. Business operators should not be more relaxed and comfortable than in the past, but under greater pressure and stricter monitoring than in the past. Financial asset management companies have entered the enterprise with a clear ownership of corporate assets, established the state of ownership of state-owned enterprises that was previously vacant and lacked, constructed a property right structure with specific owners responsible for the enterprise, and introduced specific state-owned capital to Solve the problems of insufficient ownership and incentives caused by unclear and specific ownership in state-owned enterprises, vague creditors' rights and interests, softening of loan constraints, and the occurrence of a large number of bad debts. Based on this, a modern corporate governance structure adapted to market competition has been established. In the process of resolving bad debts, profound changes in the state-owned enterprise system have been achieved.

Debt-to-equity asset restructuring

The advantage of debt-to-equity swaps over other corporate debt relief measures is that financial asset management companies have obtained a shareholding after the corporate debt-to-equity swaps, which can be used to participate in or control the enterprise and carry out asset restructuring from a deeper and more fundamental enterprise. System reform manpower to solve the problem of bad debts. Financial asset management companies may have varying degrees of shareholding in debt-to-equity enterprises, which may lead to differences in the operation of the corporate restructuring process and the realization of restructuring benefits. Financial asset management companies' holdings and restructurings of debt-to-equity enterprises have changed from weak to strong. There are roughly three cases:

The first is to reduce the debt burden of enterprises. Financial asset management companies hold fewer shares in enterprises and have less influence or control. They mainly solve the problem of corporate non-performing liabilities by reducing the burden of corporate liabilities. After debt-to-equity swaps, corporate debt burdens are reduced, interest costs and expenditures are reduced, and asset-liability conditions are improved. It is possible to reverse losses and turn the equity held by financial asset management companies into good equity, achieving the goal of recovering losses from non-performing assets. However, financial asset management companies have not been involved in the adjustment of the internal system of the company. If the company's operating mechanism is not improved, the debt burden of the company is reduced by debt-to-equity swaps, which tends to cause the trend of softening loan constraints and may also generate new losses and non-performing liabilities ; Even if turning losses into profits, it is mainly because of enjoying debt-free preferential policies, without rectification measures, and failing to convince people, it is easy for other non-performing debt companies to wait or pursue the reverse guidance effect of national debt reduction policies.

The second is to return assets and equity as soon as possible. Financial asset management companies hold a strong controlling interest in the conversion of corporate bonds. In the case that the company cannot quickly turn losses into profits, the financial asset management company mainly adopts methods such as liquidation and recovery of debts, realization of property rights transactions to recover asset rights and interests as soon as possible, and strengthens supervision of the company's operating team to prevent damage to capital equity holders. Behaviour continues to expand. The financial asset management company's strategic choice to recover asset interests as soon as possible may either adopt a combination of reorganization with good assets to improve the quality of corporate assets, or it may adopt a method of realizing assets at low prices to impair corporate development.

The third is holding and reorganizing enterprises. Financial asset management companies obtain corporate control through debt-to-equity swaps, and vigorously adjust and restructure their operating systems. In terms of assets, measures have been taken to increase investment, mergers and acquisitions, etc. to improve asset quality, strengthen corporate strength, and enhance capital appreciation capabilities; in terms of operations and systems, adjust and reorganize corporate management teams, establish an enterprise system with clear property rights, clear rights and responsibilities, and improve enterprises Operating efficiency, turning losses into profits, eliminating defects in the corporate system and corporate behaviors that lead to bad debts, and realizing healthy and efficient development of enterprises. Financial asset management companies can take advantage of the appreciation of corporate assets in a suitable period after corporate reorganization has achieved good results. Under the trading conditions, transfer equity, recover funds, and even obtain multiplication gains.

Debt to equity

The first three situations mentioned above, the first is that debt-to-equity swaps focus on reducing the debt burden of enterprises, which is not much different from other debt relief measures and it is difficult to achieve good results. Second, financial asset management companies take measures to recover their equity as soon as possible. Compared with other measures to deal with non-performing debts, the reliability of asset recovery is improved, but there are short-term behaviors of financial asset management companies that harm corporate development and lead to loss of state-owned assets. risks of. Third, financial asset management companies relied on their holding rights to carry out comprehensive adjustments and reorganizations of enterprises, mainly to solve the problem of corporate non-performing liabilities and losses from a deeper level of the system in order to build an efficient operating system, increase pressure on asset equity, Strengthening the management of enterprises to eliminate bad debts can achieve better results than other debt reduction measures. Debt-for-equity swaps should take this approach seriously.

In the case of the financial asset management company's holding of the enterprise, if the financial asset management company cannot control the debt-to-equity enterprise and implement reorganization and increase pressure, the effect of the debt-to-equity conversion will mainly depend on the company's independent behavior and rely on the debt-to-equity swap alone. It is difficult to separate or eliminate the risk of corporate misconduct when selecting companies before stocks. In the case of non-performing debt companies generally expecting to enjoy national debt relief and debt relief in order to get rid of debt pressure, if financial asset management companies cannot implement restructuring and restructuring of debt-to-equity holdings under increasing pressure, debt-to-equity swaps may pose the greatest risk of debt loss. A solution. After the creditor's rights are converted into equity, the creditor loses the right to recourse on the principal and interest of the non-performing loan, while the equity owner bears the risk of corporate losses and the risk of unethical business behavior of the company. It may suffer the loss of revenue caused by the loss of the company and the failure to pay dividends, resulting in corporate bankruptcy. Loss of equity. In a non-profit state, the company does not have to pay dividends to equity holders and must pay interest to creditors. Moreover, in the case of unknown state-owned enterprises 'property rights, weak pressure on state-owned shareholders' equity, and weak supervision, debt-to-equity swaps enable companies to convert bond pressure and debt repayment. The risk is transferred to the financial asset management company. In the case of corporate investment and its good returns and lack of funds, enterprises are willing to bear the burden of interest and debt repayment. Borrowing investment, but after the investment failure of the enterprise falls into a serious loss, debt-to-equity swaps will reduce the interest burden on the enterprise and shirk investment. Lost benefits. Under the circumstances that the reform of state-owned enterprises 'property rights is more difficult and thus relatively lagging behind, for state-owned enterprises, the vague pressure on state-owned equity is much weaker than the pressure on state-owned banks' claims. Enterprises must pay interest to banks at the loan interest rate regardless of profit or loss, and the loan principal and interest owed by the company will no longer be punished by the bank for its loans. However, dividends can only be paid when the company aims to make profits to shareholders. Under the situation that state-owned equity has weak control over the enterprise, the business operator can intentionally reduce profits or maintain losses or even make losses without paying dividends to equity holders at all, or without reinvesting profits, causing state-owned capital equity to not be increased as it should be. Debt-to-equity swaps may make it possible for companies to obtain the benefits of equity capital free of charge after exempting their debt burden. Both creditor's rights and equity interests are lost. Facing the risk of loss of equity, financial asset management companies must obtain control and operating control over debt-to-equity enterprises to ensure improvements in asset conditions and realization of equity.