Construction Bank plans 24b yuan debt relief for Wuhan Steel

[SHANGHAI] China Construction Bank Corp, the nation's second-largest lender, said it plans to raise 24 billion yuan (S$5 billion) with Wuhan Iron & Steel Group for a fund that will help lower the unprofitable Chinese steelmaker's debt levels.

The two companies have already raised 12 billion yuan in the first stage of fundraising after reaching an agreement on Aug 18, the Beijing-based lender said in a statement on its website on Tuesday. A representative for Wuhan Steel couldn't immediately be reached for comment.

The fund, the first in China that's aimed at relieving debt at state-owned enterprises, will invest in shares of Wuhan Steel's units and take over some of the group's maturing debt, the 21st Century Business Herald reported earlier, citing comments from Zhang Minghe, who leads Construction Bank's debt-to-equity program.

Chinese policy makers are stepping up their fight against excessive leverage, with cabinet this week releasing guidelines for reducing corporate debt and for how banks may swap debt to equity. Corporate debt jumped to 165 per cent of China's gross domestic product in 2015 from 105 per cent a decade ago, according to Bloomberg Intelligence.

The Wuhan Steel fund "looks like a debt-to-equity fund", said Ma Kunpeng, a Shanghai-based analyst at China Merchants Securities Co. "The government is making a coordinated effort to tackle high corporate leverage. That means they are serious about it so I wouldn't discount the potential effect of it."

Wuhan Steel, China's sixth-biggest steelmaker by output, is poised to be taken over by its bigger peer Baosteel Group Corp in a government-led deal to create the world's No 2 producer.

The tie-up will put Baosteel's credit rating under pressure because of its target's weaker financial position, Moody's said Sept 23.

Of the initial fundraising, Wuhan Steel contributed 2 billion yuan, while Construction Bank raised the rest from unidentified investors, according to the Business Herald. The total amount of 27 billion yuan that is being sought may help lower Wuhan Steel's leverage ratio of 73.7 per cent by 10 percentage points, the publication said.

Construction Bank said it has reached out to other highly indebted companies with growth prospects to help them lower leverage.

BLOOMBERG