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Foreign Lenders Are Trying to Reopen
Talks on a Chinese Debt
By MARK LANDLER
ONG KONG -- Foreign banks that are fearful of huge losses on
loans they had thought were guaranteed are seeking to restart
deadlocked negotiations with Chinese officials on ways to salvage a
troubled state-owned company that owes $5.6 billion.
"We want to sort this out," Neil McCauley, a senior executive at
Standard Chartered Bank and chairman of the steering committee for the
creditors, said Wednesday. "Everyone is in close contact with everyone
else."
Last week, the government of Guangdong province, which owns
Guangdong Enterprises, abruptly announced that it would stop making
interest payments on the debt. The provincial government's action came
after the creditors rebuffed a complex proposal to overhaul Guangdong
Enterprises, in which the banks and the government would have shared
the company's losses.
Saying the loans were guaranteed by the provincial government, the
banks demanded that Guangdong repay them by injecting an additional
$1.8 billion of assets into the financially stricken company.
The impasse underscores the gap between foreign lenders and
government in China. As China sets out to overhaul its corporate sector,
it is rewriting the rules on lending to companies. It is abandoning old
practices that allowed the banks to make cozy deals with provincial
officials while paying little regard to creditworthiness.
The banks are not accepting the new reality without a fight. Scarcely a
day after Guangdong officials presented their plan to overhaul
Guangdong Enterprises in May, the creditors dismissed it as inadequate.
"The creditors are really being tough," said Andy Xie, a strategist at
Morgan Stanley Dean Witter in Hong Kong. "But they're not being
realistic. This will go down to the wire, and the creditors will have to
back off."
The Chinese have not hesitated to take an uncompromising stance
before. Last October, they forced another troubled state-owned
company, Guangdong International Trust and Investment, or Gitic, into
bankruptcy, after it sank under $4.3 billion in debt. Although the debts of
Guangdong Enterprises are even larger, the Chinese officials say they
believe it is worth saving.
Salvaging Guangdong Enterprises is not the same as bailing it out,
however. Under the terms of the provincial government's plan, the
company's main Hong Kong subsidiary would be recapitalized by the
grant of a profitable water business. Also, equity would be swapped for
a portion of the company's debt.
The creditors estimate that the proposal would result in 20 percent to 40
percent losses on their loans. Banks that lent money to the company's
most troubled Hong Kong subsidiary, a food distribution company,
Guangnan Holdings, could end up with losses of more than 50 percent.
"The creditors disagree with the fundamental premise that the government
and the banks should share the pain equally," said a person involved in
the talks. "They still feel the loans were guaranteed by the government."
Although Chinese officials have taken a tough line, analysts say they
cannot afford to alienate the banks. Foreign banks recoiled after Gitic
was thrown into bankruptcy, and they cut off loans and raised the
prospect of a credit shortage in China's already slowing economy.
So far, the provincial government has tried hard to distinguish its
treatment of Guangdong Enterprises from that of Gitic. Although it
stopped paying off the company's debt in January, it continued making
interest payments -- mostly as a good will gesture. The government also
hired Goldman, Sachs & Co. to draft a proposal that would conform
with international standards.
Executives involved in the talks said the Chinese official overseeing the
process, the executive vice governor of Guangdong, Wang Qishan, had
taken a political risk in proposing such a revamping of the debt. The
pre-emptory dismissal by the banks put Wang in an awkward position,
they said.
"Wang Qishan had to sell to party officials in Beijing that he wanted to do
this in a Western way," one executive said. "Then he got a slap in the face
by the creditors."
China's decision to suspend interest payments is regarded by the
creditors as a way for Wang to reassert his role. In what could be further
pressure, rumors circulated here this week that the Chinese had prepared
a plan to liquidate Guangdong Enterprises -- much as they did with Gitic. |
