TWO of China’s largest banks are considering setting up new companies for the purpose of handling debt-to-equity swaps, officials at the two lenders said, in the latest steps taken to mitigate the heavy debt burden that has put a strain on corporate earnings.

    Earlier this year, policymakers introduced the debt-to-equity swap program to convert some bank debt into equity, as a way to reduce China’s corporate debt overhang, a result of firms finding it tougher to repay their loans in leaner times.

    “Our goal is to do as many of those projects as we can,” said Zhang Minghe, head of the debt-for-equity work team at China Construction Bank Corp. (CCB), the country’s second-biggest lender, during the bank’s post-earnings call late Friday.

    Bank of Communications Co. (BoCom) also said it was exploring the possibility of setting up a new entity focusing on debt-for-equity swaps in a separate post-earnings call late Friday.

    CCB has been leading China’s latest round of debt-for-equity swaps, announcing two multi-billion deals since the government re-launched the program earlier in October.

    CCB has more than 50 debt-for-equity swap deals in the pipeline, which will span a variety of sectors.

    “As in the Wuhan Steel and Yunnan Tin swaps, which involved steel and non-ferrous metals industries that are struggling with overcapacity, we will also choose from leading firms in other overcapacity sectors such as the highly indebted coal and chemical industries,” Zhang said.

    Banks can expect to receive more favorable deal arrangements and pricing, if they use related institutions to conduct the swaps, bankers have said.

    CCB’s two deals were conducted by related institutions — CCB Trust Co., CCB Principal Capital Management Co. and CCB International (Holdings) Ltd., the bank has previously disclosed.

    Earlier last month, CCB agreed to set up a 24 billion yuan (US$3.55 billion) transformation and development fund with Wuhan Iron and Steel Group to help the steel firm reduce leverage.

    CCB’s board and management team look at debt-for-equity swaps as “an opportunity” to better combine traditional banking with equity investment, and is “actively applying and preparing” an asset management firm-like institution to focus on debt, equity investment and corporate daily management, Zhang said.

    (SD-Agencies)