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44 billion restructuring deal at an insolvent coal mining company in eastern Shandong province offers a glimpse
into how China is preparing to tackle a corporate debt burden that has ballooned to $17.9 trillion.

Loss-making Feicheng Mining Group struck the deal last December with 10 banks, led by Agricultural Bank of China
Ltd (AgBank) which agreed to extend the group’s loans at concessionary interest rates.

Bankers say the settlement, which required 10 months and 41 rounds of negotiations to complete, only advanced
after the formation of a creditors’ committee, a
mechanism the China Banking Regulatory Commission (CBRC) officially endorsed last year to manage “troubled
firms with a large volume of debt”.

With bankruptcy, particularly at state-owned companies, practically taboo in China, and lenders forbidden by the
CBRC from halting or recalling loans without notice, creditors’ committees are at the vanguard of this monumental
exercise.

China’s leaders want the restructuring to address financial risks while avoiding big employee lay-offs.

“The solution for zombie firms isn’t just bankruptcy,” a Shandong-based banking official told Reuters. “The impact of
bankruptcy is just too big. Just think about the thousands of workers. Social stability is key.”

Stability is always uppermost in the minds of Chinese leaders, and even more so this year, ahead of the five-yearly
party congress this autumn, when a new generation of
senior leaders will be selected.

“China is avoiding the crisis of calling in loans that can’t be repaid anyway,” said Paul Gillis, professor of accounting
at Peking University’s Guanghua School of
Management. “This buys time to do things in an orderly way.”

It was the Shandong provincial government that stepped in and demanded the restructuring of Feicheng Mining, the
company said in a filing.

Its parent company Shandong Energy Group, the province’s biggest state-owned firm, originally proposed to get
Feicheng’s 10 lenders to take a 60 percent loss on their 9.95 billion yuan ($1.44 billion) in loans, said Wang Yanlei,
vice governor of the Shandong branch of AgBank.

Feicheng had been modestly successful before embarking on a debt-fuelled expansion in 2009, but the plunge in
coal prices in 2012 proved devastating, landing the company with five straight years of losses.

After the provincial government intervened, a creditors’ committee was established to hammer out a debt
restructuring agreement.

That deal created a new operating company, which took control of the firm’s good assets and half of its loans.

Another 30 percent of the loans remained at the old firm, and 20 percent were taken on by Shandong Energy, which
separately entered into a debt-for-equity swap with
China Construction Bank Corp to settle 21 billion yuan of its own borrowing.

Feicheng’s loans were extended by eight years at a concessionary interest rate of 3 percent, lower than the central
bank’s benchmark lending rate.

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