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Debt-for-equity swaps to substantially reduce corporate leverage

Updated: Oct 14,2016 9:44 AM     Xinhua

BEIJING — China’s newly-initiated debt-for-equity swaps will substantially lower the debt levels of indebted companies, and no cap will be preset on the scale of the scheme, an official with China’s top economic planner said on Oct 13.

The deleveraging effect of the program should be obvious, and model simulation results show that many companies’ debt-to-asset ratios will decrease by about 10 to 20 percentage points, said Zhao Chenxin, a spokesman for the National Development and Reform Commission (NDRC).

China’s State Council on Oct 10 released guidelines on the long-discussed debt-for-equity swaps, pledging that the scheme will be conducted in an orderly fashion as the country steps up efforts to tackle high corporate debt.

The program will help substantially ease companies’ financial burdens, Zhao said at a news conference, adding that “the final outcome and effectiveness will hinge on negotiations between companies and creditors.”

High corporate leverage in China has been a major threat to companies’ profitability and to broader financial stability.

Debt-to-equity swaps are generally believed to benefit both banks and troubled companies. They can ease pressure on companies and beef up banks’ balance sheets, releasing capital for investment.

This round of the debt-for-equity conversion program is “market-oriented,” and there is no predetermined scale of the plan, Zhao stressed.