SHANGHAI China's state-owned metals trader Sinosteel will be permitted to swap 27 billion yuan (3.11 billion pounds) of debt into equity convertible bonds, the online financial magazine Caixin reported on Tuesday citing anonymous sources.
It marks the first swap this year under a wider debt-to-equity swap programme mooted by policymakers as one solution to reducing China's corporate debt overhang.
Policymakers hope the swap plan will help clean up a bad debt problem that is increasingly worrying global investors amid warnings that a banking crisis is looming.
Debt has emerged as one of China's biggest challenges, with the country's total load rising to 250 percent of GDP last year. At about 145 percent of GDP, corporate debt "is high by any measure", China IMF Mission Chief for China James Daniel said in the fund's annual review of China in August.
China's vast state-owned sector had accumulated total liabilities of 83.74 trillion yuan by the end of July, up 17.6 percent on the year and representing 66.2 percent of total assets, official data showed.
Caixin said Sinosteel's 27 billion yuan swap plan would represent nearly half of the 60 billion yuan of debt owed directly to financial institutions. That debt would be changed into convertible bonds, which could be exchanged for equity in the company at a later date.
Officials at Sinosteel could not be immediately reached for comment.
Sinosteel would set up a special subsidiary to handle the conversions, which would also receive a 10 billion yuan capital injection from a Chinese central government body responsible for managing state-owned assets, the magazine said.
The remaining debt would still need to be repaid but at a low interest rate of around 3 percent, Caixin said.
The publication had previously reported that Sinosteel and its subsidiaries had more than 100 billion yuan of debt at the end of 2014.
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.
China has floated plans to introduce more market tools for managing the country's rising debt load, including credit default swaps and debt securitisation.
In March, Reuters reported that Chinese policymakers were planning a debt-to-equity swap programme that would convert some non-performing bank debt into equity. It was later confirmed by regulators.
Officials have insisted the programme would be used to restructure competitive companies suffering temporary operational challenges, and would not prop up so-called "zombie enterprises", those that would not survive without life support from local banks and governments.
China experimented with debt-to-equity swaps in the late 1990s as part of sweeping reforms to the state sector that led to around 28 million layoffs over five years. But experts said the programme created perverse incentives and made state-owned firms less willing to find ways to pay back debts.
Wang Hongzhang, chairman of the China Construction Bank, one of the country's biggest banks, warned earlier this year there was a danger the programme would simply convert "bad debt into bad equity".
Caixin reported on Monday that some of the liabilities of another debt-stricken steel conglomerate, the Tianjin-based Bohai Steel Group, would be converted into bonds as part of a proposed rescue plan for the firm.
It owes 192 billion yuan to 105 creditors, and Caixin quoted an unidentified banker as saying that the proposals could lead to bank losses of at least 60 billion yuan.
Xie Duo, head of the China Interbank Market Trade Association, told a forum at the end of August that China's previous debt-to-equity swap programme "played a positive role" in the restructuring the country's economy, but it also posed risks.
"If used improperly, the simplistic implementation of asset restructuring by sacrificing the interests of creditors is not in accordance with the rules of development," he said. ($1=6.67 yuan)
(Reporting By Nathaniel Taplin, Samuel Shen and David Stanway; Editing by Shri Navaratnam)