Lawyers' Interpretation of "Guidance Opinion on Marketizing the Bank Debt-for-Equity Swap"

Release time:2016-10-31 11:09
In October 2016, State Council of the People's Republic has issued the "Guidance Opinion on Marketizing the Bank Debt-for-Equity Swap" (hereinafter referred to as the Guiding Opinion). The government promulgated this Guiding Opinion, in order to implement the spirit of the Central Economic Work Conference, put the government work report into practice, effectively reduce enterprise leverage ratio and enhance long-term growth of economy. Compared with the previous guide opinion. There are two notable features: first, the marketization; second, the legalization. The following paragraphs will focus on these two features.

The characteristics of the marketization is mainly reflected in the following aspects:
1. Marketizing the Debt-for-Equity Swap should have the follow prerequisite: first, enterprises should have good prospects for development, feasible enterprise reform plan and difficulty-relief efforts. Second, enterprises' production equipment, products and competence must conform to national industrial development direction. Third, enterprises should have advanced technology, marketable products, environmental protection and work safety conditions. Finally, enterprises should have good credibility without records of improper activities.

The government should encourage outstanding enterprises which have temporary obstacles but good prospect for development to start bank debt-for-equity swap. These enterprises include the enterprises which have difficulties because of periodic fluctuation, the newly-emerged growth enterprises that have high liability and the lifeline enterprises which have strategically dominant position in national economy.

The following types of enterprises are prohibited as the object of market-oriented debt-equity swap: zombie (ineffective and unpromising) companies with malicious evasion of debt; enterprises without clear debtor-creditor relationship and credibility; and companies which may cause over-capacity of production.

2. Carrying out market-oriented debt-equity swap through executive organizations.
Except otherwise as determined by the State, the Bank shall not directly convert debt to equity. The bank shall only transfer the debt into equity through executive organization.    

The government should encourage financial asset management companies, insurance asset management institutions, state-owned capital investment and operating companies and other types of implementing agencies to participate in market-oriented debt-equity swap. The government also need to support banks to make full use of the existing eligible institutions, or to apply for the establishment of new institutions to implement debt-to-equity reform. 

To encourage all kinds of implementing agencies to open, fair and just competition to carry out. And to support all executive organizations, private equity investment funds and other equity investment institutions to cooperate.

3. Self-determined prices and conditions of market-oriented debt-equity swap through consultation.
Banks, enterprises and implementing agencies could determine prices and conditions of assignment of credit. For situation involving multiple creditors, largest creditors or creditors who initiate market-oriented debt-for-equity swap could form a creditors' committee to coordinate.        

With approval, it is allowed to determine the conversion price of state-owned companies by reference to the transaction prices of the secondary market of the stock, and allow the price of the conversion of state-owned unlisted companies to be determined with reference to the trading price of secondary stocks market. In order to meet the needs of market-oriented debt-to-equity transformation, it is necessary to further clarify and standardize the procedures for the transfer of state-owned assets.

Perfecting the policy of preference shares issuance, allowing the creditor's rights to be converted into the preference shares through consultation and legal procedures, and the shareholders' equity of the preferential shares shall be determined reasonably according to law. 

4. Market-oriented to raise debt-equity funds.
The funds needed for the debt-for-equity swap could be raised by the executive organizations in a variety of market-oriented ways, including to encourage the executive organizations to lawfully raise capital from investors, to support the executive organizations to issue specific financial bonds for market-oriented debt-to-equity swaps, and simplify the approval procedures.

5. Adopt all kinds of market-oriented means to achieve equity withdraw.
If the executive organizations has an expectation of equity withdrawal, it may negotiate with the enterprise to withdraw the equity held by the enterprise. If a debt-to-equity enterprises is a listed company, the debt-equity swap can be lawfully transferred out. At the same time, the securities regulatory requirements such as the restricted selling period shall be observed. If a debt-to-equity enterprises is a unlisted company, this company should be encouraged to use the way of merger and acquisition, regional equity market transactions and other channels to achieve the transfer out.

The characteristics of the legalization is mainly reflected in the following aspects:
1. Standardize the implementation of equity changes and other related procedures. The debt-for-equity swap enterprises shall complete the business registration or change registration formalities in accordance with the law, such as the establishment of the company, the alteration of the shareholders, and the reorganization of the board of directors.

2. Protect the rights of shareholders in accordance with the law. After the implementation of market-oriented debt-equity swap, it is necessary to ensure that the executive organizations enjoy the rights of shareholders, including participating in making significant business decisions and equity management within the scope of laws and the articles of association.

The implementing institution of the bank shall determine the reasonable shareholding in the debt-to-equity swap enterprise and shall bear the limited liability according to the laws and regulations of the Company Law.

In the current economic situation, to launch the debt-for-equity could help enterprises through difficulties, reduce costs, improve efficiency and enhance competitiveness.

By Jia Xunjun