Workers walk past Sinosteel's headquarter building in Beijing, China, October 21, 2015. REUTERS/Kim Kyung-Hoon

SHANGHAI (Reuters) – Sinosteel, the troubled Chinese steelmaker which became one of the first state-owned firms to encounter bond repayment problems in 2015, is in the final stages of completing a debt-to-equity swap plan, online financial magazine Caixin reported on Tuesday.

The plan has been submitted to the State Council, China’s cabinet, for approval and will soon begin in earnest, Caixin said, citing anonymous industry sources.

Workers walk past Sinosteel’s headquarter building in Beijing, China, October 21, 2015. REUTERS/Kim Kyung-Hoon

Sinosteel may be permitted to swap half of its debt into equity, Caixin added. The magazine estimates Sinosteel and its subsidiaries had 100 billion yuan ($15 billion) of debt at end-2014.

Calls to Sinosteel went unanswered.

In October 2015, Sinosteel asked bondholders not to exercise an early redemption option on one of its bonds maturing in 2017 as the firm would not be able to make full payment.

The firm has repeatedly extended the registration period for bondholders to apply for early redemption and offered shares in its listed subsidiary Sinosteel Engineering & Technology Co Ltd as additional collateral.

In March, Reuters reported that Chinese policymakers were planning a debt-to-equity swap plan which would convert some non-performing bank debt into equity, a plan which was later confirmed by regulators.

Debt-to-equity swaps are just one of several options proposed by policymakers to help clean up China’s bad debt problem, which is increasingly worrying global investors.

On Tuesday, the China Securities Journal reported that issuance of securities backed by bad debt, another partial solution mooted by regulators, could be over seven billion yuan in the second half of 2016.

Although debt-to-equity swaps would relieve pressure on borrowers, banks and other creditors have been lukewarm on the idea at best.

Swapping debt into equity in a troubled borrower might get bad loans off lenders’ books, but China Construction Bank (CCB)Chairman Wang Hongzhang warned earlier this year that there was a danger of simply converting “bad debt into bad equity”.

Debt-to-equity swaps also would increase risk in banks’ portfolios, wrote analysts at ratings agency Fitch after the program was announced.

“Equities have lower priority of claims relative to debt during the liquidation process and some bank loans have collateral, which can provide protection and mitigate losses in the event of default.”

“Equity investments are also likely to have a higher risk weight than bank loans. As such, a large-scale debt-to-equity swap is likely to weaken banks’ capital positions.”

(Reporting By Nathaniel Taplin; Editing by Kim Coghill)

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