Monday, May 23, 2016

From China's companies owing you to you owning the companies - a bad debt story

"I cannot pay you back, come, you take over my seat" .

If the company cannot pay you back the debt it owns you, how will owning the company help? Especially when you have no say in its running and management?

This is a sweet bailing out of indebted companies and deft financial engineering sleight of hand, giving a breather to the liquidity of the markets.

How will the markets react to this? Will they sell off to get back their money? Or will they rush in on higher equity amidst poor EPS?
Beijing has stepped up its battle against bad debt in China’s banking system, with a state-led debt-for-equity scheme surging in value by about $100bn in the past two months alone.
The government-led programme, which forces banks to write off bad debt in exchange for equity in ailing companies, soared in value to hit more than $220bn by the end of April, up from about $120bn at the start of March, according to data from Wind Information.
Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities.