FEATURE: China’s Baowu inks deal to trim Bayi’s huge debt
Established in 1951, Bayi Steel is a state-owned steelmaker listed on the Shanghai stock exchange and hosts 8 million tonnes/year of crude steel capacity. On the latest available data, in the first half of 2018, it produced 2.34 million tonnes of finished steel.
However, persistently high raw materials procurement costs in this remote corner of China, combined with poor demand due to the suspension of public-private partnership projects, have seen the mill’s total liabilities soar to Yuan 15.65 billion ($2.3 billion) and sending its asset-liability ratio as high as 81.5% as of Q2 2018, according to the company’s semi-annual report.
Bayi Steel’s ultimate owner is China’s biggest steel conglomerate (and Baosteel Bayi’s parent), China Baowu Steel Group Co, and the framework agreement signed on January 8 is part of Baowu’s ongoing efforts to clean up the finances of many of its group members, Mysteel notes.
“Under our group’s strategic spatial layout in China, Bayi (Steel) is a very important component in the west, so it is very important that we maintain its financial health,” a Baowu official explained.
Signing the framework agreement were Baowu Steel Group Co, Xinjiang Investment Development Group Co (a local asset management company established by China’s State-owned Assets Supervision and Administration Commission) and other eight bank creditors, the announcement said.
Other details including the value of the increased stakes and changes in shareholder composition were not revealed as the agreement is still at a preliminary stage and uncertainties regarding its implementation still remain, according to the announcement. Currently, Bayi’s controlling shareholder with a 50.02% stake is Baosteel Group Xinjiang Iron & Steel Co, though its equity ratio is likely to be diluted with the execution of the swap. Bayi Steel mainly produces high-speed wire rod, rebar, hot-rolled coil, cold-rolled sheet and medium plate, Mysteel understands.
Chen Derong, chairman of Baowu Group, described Bayi Steel’s debt for equity swap as “an important measure to support the reform and development of the key enterprises. It is also an exploratory attempt to reduce leverage ratio and prevent and deal with debt risks,” Xinhua quoted him as saying. After this swap is executed, the steelmaker’s debt-asset ratio could be reduced to around 31%, according to Xinhua.
Not only Bayi Steel, many Chinese steel companies have resorted to various means to lower their asset-liability ratio so as to meet the ambitious target of 60% set by China Iron & Steel Association set in March 2017. As of Q3, the ratio of member steel mills was still as high as 66.11%, though it was down from the 67.23% seen at the end of 2017, according CISA statistics.
Not long ago on December 5 2018, Hunan Valin Steel Co, the listed arm of Hunan Valin Group in central China’s Hunan province, also revealed its debt-for-equity plan, which involved a total amount of Yuan 3.3 billion, as Mysteel reported.
“A debt-for-equity swap is the most direct and effective way for steel enterprises to reduce their (debt) burden and leverage ratio,” said Liu Zhenjiang, CISA’s secretary general in March 2017, Xinhua reported the time.
However, only a few of such plans have eventually been completed, Mysteel notes. “Debt-for-equity is a long-term investment and usually carries low interest (so) banks will have to consider the interest costs involved. This is especially the case for enterprises in the steel industry which is strongly cyclical in nature. Financial institutions have extra concerns,” said a banker who declined to be named.
During the first half of 2018, the value involved in debt-for-equity plans reached Yuan 1.73 trillion whereas only Yuan 350 billion was paid in, according to statistics from China Banking and Insurance Regulatory Commission.
Written by Olivia Zhang, zhangwd@mysteel.com
Edited by Russ McCulloch, russ.mcculloch@mysteel.com
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