China Mandates That Firms Get Bondholder Approval on Restructuring

(August 2, 2011) — In an effort to ease concerns over possible defaults on local government debt, the National Development and Reform Commission (NDRC), China’s top economic planning agency, has ordered state-owned companies planning to restructure assets to obtain approval from bondholders.

“Asset restructuring during the duration of an enterprise bond is associated with the company’s profitability prospects and its ability to service debt, so it’s an important issue to bondholders,” the NDRC — — which is responsible for approving issuance of corporate bonds by non-listed companies — said in a notice dated July 21, the Wall Street Journal reported.

The commission said: “Restructuring assets while bonds are outstanding is something that concerns the company’s profit outlook and debt solvency. So before making decisions, government bodies and major shareholders must take into full consideration their obligations, which are specified in bond prospectuses.”

Historically, only shareholders and government regulators needed to approve such asset restructuring plans.

China’s debt burden — which has reached about 10.7 trillion yuan ($1.7 trillion) — has raised concerns among investors and regulators. The country’s poorly-funded local governments are up against an increasing level of pressure to meet repayments.

Last month, a Chinese ratings firm threatened to downgrade two Yunnan government-linked firms. The threat of a downgrade was a result of uncertainty stemming from the firms’ planned restructuring of their assets.

Meanwhile, the NDRC told a Chinese newspaper that the Chinese economy will not experience a “double-dip” and the government is capable and confident of keeping steady and relatively fast growth in the long-run. NDRC spokesperson Li Pumin stated that improving scientific and educational development and looser institutional restrictions will work to fuel stable growth.