Coal Industry Liability Risk in Eastern Central Coal Enterprises

The overcapacity industries such as coal and steel are still under pressure, and in the deleveraging “battle” above the trillion-dollar level, the game between local governments and financial institutions has been further upgraded.

A number of provinces made arrangements to resolve the related industry debt risks by formulating rules or oral instructions, and tried to inject credit into key support companies in various ways to guide financial institutions to continue their efforts. Banks and other financial institutions generally adopt the “strictly controlled new, stock-out” strategy for overcapacity industries, and carefully balance the sequel and exit.

Data from the China Coal Industry Association shows that in 2015, the loss of large-scale coal enterprises exceeded 90%, and the industry’s total profit was only 44.1 billion yuan, which was one-tenth of 2011, while the total liabilities increased by 10.4% year-on-year to 3.68 trillion yuan. 90 The total debt of large-scale coal enterprises is as high as 3.2 trillion yuan.

As of the end of the first quarter, the average debt-to-equity ratio of the 39 listed coal companies was 59.16%, and 10 of them exceeded the 70% warning line. The differences in the risks of coal companies between different regions have also gradually emerged.

“In Shanxi and Shaanxi, the current situation in the coal industry is improving. However, in some eastern and central regions such as Henan, Hebei, Shandong, Anhui and Jiangxi, the debt risk of some companies with exhausted and relatively serious losses is relatively higher because of their assets. No, even under the premise of supply-side reform, the space for reducing losses is limited, said the analysis agency.

In the face of high debt risks, the local government, in view of maintaining the stability of the financial environment, tends to adopt a gradual, “preservative” approach to resolve corporate debt crisis, and is very cautious about how to achieve market clearing by means of pure debt default. .

Shanxi Province has recently issued the “Detailed Rules on Strengthening Financial Support” in the country, and proposed that the seven major coal groups in Shanxi Province will not be involved in loan-drawing activities in 2016 and continue to provide competitive, marketable, and effective high-quality coal enterprises. Give financial support, and strive to smash the coal industry by no less than the previous year. The Shanxi Provincial Coal Industry Finance Work Conference held on June 1st renewed the request that the government and enterprises should jointly exert efforts to ensure that the seven major coal enterprise groups in Shanxi do not suffer the risk of default of the debt. According to sources, the Shanxi Provincial Government plans to provide a 3.5 billion yuan credit guarantee to the seven major coal groups and may issue a letter of promise.

In other provinces, even if the government does not publish such rules publicly, it will often require private banks or other financial institutions to conduct blood transfusions on key companies as far as possible through private consultation or verbal communication. “Generally all local government financial offices come forward. In terms of **, they will ask the bank not to reduce the balance, extend the **, and cut down the ** interest rate,” said a state-owned investment banking department official.

"In terms of debt instruments, the government will inject credit through direct injection of assets, other state-owned enterprises, and other guarantees to ensure that companies can renew their bonds," said the investment bank.

However, under the background of the gradual spread of debt risk in overcapacity industries, the attitude of financial institutions to overcapacity industries is more cautious under the premise of “preserving pressure”.

Hua Xia Bank stated that in 2016, it was clear that the balance of credits in and out of the on- and off-balance sheet credits of the coal and steel industry accounted for the proportion of credit balances in and out of the Bank's internal and external credit controls at the beginning of the year. In the key areas where coal and iron and steel businesses are relatively concentrated, a classified disposal plan for “collecting a batch of batches, transferring one batch, continuing to do one batch, reorganizing one batch, writing off batches, and paying off one batch of debts” was formulated.

China Merchants Bank also stated that in 2016, it implemented the “pick-up” and “retreat” classification management strategies for overcapacity industries, managed through the “customer list system”, and made one-for-one policy, withdrawing from the industry for long-term disadvantages and hopelessness. "Zombie Enterprise".

According to data from the Central Bank, as of the end of the first quarter, the balance of medium and long-term growth in the overcapacity industry decreased by 0.2% year-on-year, with the first negative growth. Among them, the balance of medium and long-term ** in the steel industry decreased by 7.5% year-on-year, and the balance of medium and long-term ** in the building materials industry decreased by 10.3% year-on-year.

“The new follow-up coal and steel industry is basically hopeless. It is difficult for banks to create new credit lines and it is difficult to issue bonds. At present, only high-risk trusts may do such projects. Although local governments have some guidance, banks It will try to negotiate with the government. In particular, some small banks are waiting for the big banks to take the lead.” A financial institution source said that after a western overcapacity enterprise had insufficient credit support from the local government, its subsequent issuance of debt was Failed to pass the bank's internal audit procedure. In terms of “debt-to-equity swaps,” the game between banks and the government is even more pronounced. “The most critical issue in the debt-for-equity swap operation is pricing. Coal and steel companies have a large body and financial information is not transparent. It will be difficult at what price to convert the debt to debt. The price is too low and the government is not happy; Too high, the bank is not worthwhile. Debt has turned into shares, and the government has lost control of the company.” said the state-owned investment banking department said.

The above analysts also stated that “the bank wants to convert Shanxi coal companies into debt-for-equity swaps, but the local government is not very happy. When the coal industry is getting better, the most profitable coal companies in Shanxi and Shaanxi provinces are now doing debt-to-equity swaps. It's a loss, because it will undermine their right to speak. In the above resource-exhausted enterprises in the eastern part of the country, the local government wants to push debts and convert shares, but banks do not want to do it."

The game will continue. Moody’s stated that local governments will try to salvage and support local companies as they deal with debt problems in industries with overcapacity, but in the long run, the resources available to local governments may be less and less.