The government of Northeast China's Liaoning Province has submitted a plan to the central government under which a troubled local steel mill would swap 70 percent of its debt into equity, with the banks that extended the loans being converted into equity holders, a senior provincial official confirmed to the Global Times Tuesday.
The official, who declined to be identified as he is not authorized to speak on the matter, said he is aware of such a proposal, verifying media reports that authorities in Liaoning are lobbying the central government to agree to the plan to save debt-ridden Dongbei Special Steel Group.
The State-owned company, which is based in Dalian and makes specialized steel for the vehicle sector, has repeatedly defaulted on its bonds this year.
The defaults involve about 4 billion yuan ($590 million). Its bondholders include institutional investors, which were not identified in media reports.
The move comes after resistance by current holders of the bonds to any move to convert the debt into equity.
The development coincided with the publication of a central government document on Monday that called for an overhaul of China's investment and financing system to stimulate market vitality.
The guideline was posted on the website of the State Council, the cabinet, on Monday.
It mentioned letting financial institutions hold stakes in companies in a trial, a move that some experts have interpreted as a sign of approval for such debt-equity swaps.
"This is a watershed … the guidelines will prompt financial institutions to actively pursue and participate in the swap process," Dong -Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told Global Times on Tuesday.
However, some of Dongbei's bondholders have balked at a debt-for-equity swap. In May, some of the bondholders asked underwriters of the company's bonds to pledge that the securities wouldn't be forcibly converted into equity.
According to a report by news portal caixin.com on Monday, at a recent investor meeting, some bondholders of Dongbei Special Steel called for blocking new financing to Liaoning Province and State-owned companies in the region.
Rumors later circulated that China Development Bank (CDB) was behind the proposal. The bank, in an online statement on Monday, stated that it doesn't have the right to make such a proposal.
Experts said that the bondholders don't want to get involved in taking an equity stake because they are negative on the company's outlook.
The steel sector is struggling with heavy debt, excess capacity and trade friction in many export markets.
"If the outlook was bright, bondholders could recoup their investment by selling their shares or reaping dividends," Wang Guoqing, research director with the Beijing-based Lange Steel Information Research Center, told the Global Times Tuesday.
Separately on Tuesday, China said it will allow the establishment of steel mills that are wholly foreign owned in the nation's four free trade zones, including those in Shanghai and Tianjin. The move was announced in a statement by the State Council.
