Yunnan Tin Strikes Debt-For-Equity Swap Deal

(Beijing) — China's biggest tin producer and exporter, which was bailed out in a debt-for-equity swap at the turn of the millennium, could become the poster child for the Chinese government's latest efforts to cut corporate leverage as the SOE comes back for more help.

Money-losing Yunnan Tin Group Co., which is owned by the Yunnan provincial government, has signed an agreement with China Construction Bank (CCB) under a program unveiled by the State Council, China's cabinet, that allows state-owned enterprises (SOEs) with good prospects to exchange their debt for equity investment with the direct involvement of banks.

The deal with CCB, the country's second-biggest commercial lender, will entail the conversion of 10 billion yuan ($1.5 billion) of bank debt into equity, according to the Beijing-based bank, which made the announcement on Sunday, just days after the State Council released detailed guidelines on how the program will work.

Under the agreement — which CCB said is the first loan-for-equity swap involving a local government-owned company under the program — CCB Trust Co., a subsidiary of the bank, will set up a fund with Yunnan Tin Group Co. The fund will raise capital from other financial institutions and invest in Yunnan Tin Group and its subsidiaries.

The investment will be made in two stages of 5 billion yuan each, and an equivalent amount of debt owed to other banks will be repaid, according to Zhang Minghe, a CCB executive in charge of implementing the swap.

But CCB itself is only making a "small investment" in the fund, Zhang said. Most of the money will be raised from other sources, including institutional investors, units of the big four state-owned asset management companies (AMCs), pension funds, the National Social Security Fund, and banks' wealth management products, Zhang said.

Although the expected rate of return on the investment is 5 to 15 percent, investors are taking a risk and will have to absorb any losses, Zhang said. Zhang echoed the comments of Lian Weiliang, deputy director of the National Development and Reform Commission, who said last week that there will be minimum government intervention and no financial guarantees by authorities.

The swap is deja vu for Yunnan Tin, which benefited from a debt-to-equity conversion in 1999 after the government launched a bailout of the country's major banks, which were saddled with trillions of yuan of non-performing loans.

As part of that program, the Big Four state-owned banks transferred 1.4 trillion yuan worth of soured assets to four national AMCs set up specifically to deal with the bad debts. One of the methods they used was to exchange loans for equity stakes in companies that were seen as being viable in the long term.

Yunnan Tin Group was one of the beneficiaries, and two of the AMCs, Cinda and Huarong, became shareholders as a result of the conversion, Zhang said, although he didn't disclose the size of their stakes.

Zhang said the firms cashed out last year, and made a return of almost 300 percent on their original investments.

For Yunnan Tin Group, the swap will come as a welcome step in efforts to deleverage and return to profitability. Over the past three years, the company has racked up losses totaling more than 6 billion yuan, while its net assets have fallen to less than 10 billion yuan from 15 billion yuan, according to Zhang Minghe.

But he said the loans that are going to be replaced by equity investment are currently classified as "normal" on the books of its creditor banks.

The company's debt-to-asset ratio is currently 83 percent and the goal is to lower it to 65 percent, according to Chairman Zhang Tao. Zhang from CCB said the first 5 billion yuan swap will cut the current ratio by 15 percentage points.

Yunnan Tin's chairman admitted that the company's financial problems are partly due to what he described as a "strategic mistake" several years ago when the company decided to increase investments in property development.

The diversion took up too much of the firm's resources and put tremendous pressure on its cash flows, he said.

The state-owned company has also been racked by corruption at the top management level. Lei Yi, a former chairman of Yunnan Tin Group, was detained by police in July 2013 and was given a suspended death penalty in January for taking bribes. Lei's predecessor, Xiao Jianming, who chaired the company from 1998 to 2008, fled the country and is on the list of the 100 most-wanted corrupt Chinese officials issued by the China National Central Bureau of Interpol.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)