China’s Ping An Bank Co., Ltd. announced that it will set up a subsidiary targeting to raise RMB10 billion (US$1.46 billion) before 2020 to focus on debt-to-equity swap deals, according to a security filing.
The company said that it plans to allocate its own capital and raise third-party capital to aggregate RMB5 billion before the end of 2019 and another RMB5 billion before the end of 2020 to establish a wholly owned asset management unit for this purpose.
Ping An’s move signals that Chinese commercial banks, from large state-owned banks to joint stock banks, are accelerating their debt-to-equity swap efforts to tackle the mounting bad debts accumulating in the country. Ping An is the first joint stock bank in China to reveal plans to set up its own debt-to-equity swap unit outside of major Chinese state-owned banks.
Previously, China’s five largest state-owned banks, including Bank of China, China Construction Bank, Agricultural Bank of China, Industrial and Commercial Bank of China and Bank of Communications, have all set up subsidiaries to buy and manage debt-to-equity swaps.
But the five largest banks are slow at implementing debt-to-equity swaps. For example, China Construction Bank is the earliest and largest player in debt-to-equity swaps. As of end of June, its subsidiary has signed agreements with 49 companies for debt-to-equity swaps totaling RMB640 billion (US$93 billion), but only RMB110 billion (US$16 billion) were invested, according to Chinese media reports.
To accelerate commercial banks’ pace of clearing bad debts, China’s Banking and Insurance Regulatory Commission recently lowered risk weighting requirements for debt-to-equity swaps. The new rule allows banks to use a risk weighting of 250% for their stakes in listed companies, and 400% for their stakes in unlisted companies.
This is compared with the previous risk weightings of 1,250% for equity investments in commercial entities and 400% for policy directed equity stakes. The lower risk weighting reduces capital required for banks to conduct debt-to-equity swaps.
Financial institutions’ subsidiaries dealing with debt-to-equity swaps are required to have a minimal registered capital of RMB10 billion, according to relevant rule in China.