By staff reporter Hu Runfeng and intern reporter Fan Junli
Guotai Junan Securities struggled for years with bad debt from its past link to a city-owned enterprise. But it succeeded as a brokerage, leading to a government-mediated deal that cleared the way for a stock offering.
One of China’s largest security firms has taken a final step to prepare for an initial public offering after shaking off its bad debt and settling with a Shanghai asset-holding company.

Guotai Junan Securities Co. Ltd., with assets of 40 billion yuan (US＄ 518 million), is ready for regulators to approve its proposed listing on the Shanghai exchange after signing a Shanghai government-mediated settlement with the Shanghai State-Owned Assets Operation (SSAO).

Under a 2004 agreement, SSAO had agreed to defer Guotai Junan’s debt of more than 1 billion yuan (US＄ 129 million). The asset manager later canceled the debt in exchange for shares in Guotai Junan, clearing the way for the securities firm to go public.

According to a plan approved by Guotai Junan’s board of directors, a total 1.4 billion shares will be issued to investors in a private placement at prices between 1.08 yuan (US 14 cents) and 1.92 yuan (US 25 cents) per share.

After the private placement, Guotai Junan’s share value will rise to as much as 6.1 billion (US＄ 790 million) and its net asset value will top 6 billion yuan (US＄ 770 million), meeting a regulatory requirement for a company’s net assets to equal at least 1 yuan (US 13 cents) per share before going public.

“This year, we’re concentrating on making internal reform rather than external expansion and adding outlets,” Guotai Junan’s Vice President He Wei told Caijing in an interview. “Our focus is to boost headquarters’ risk control ability.”

Guotai Junan’s strategy calls for selling stock in two bundled transactions.

First, company shareholders will buy two shares for every 10 they already own. Based on the company’s current share capital, the tranche will involve about 940 million shares.

Second, investors will buy shares of Guotai Junan Investment Co., an investment unit of Guotai Junan that manages the parent firm’s burden of unsecured affiliates. It was founded in 2001 by the parent’s shareholders.

That same year, SSAO bought shares in Guotai Junan that were not transferred to the investment unit. The deal was worth 4.32 billion yuan (US＄ 560 million), making SSAO the firm’s largest shareholder.

Goutai Junan struggled with bad debt from the start. The firm was created by the 1999 merger of two firms – Junan Securities Co. and Guotai Securities Corp., a formerly city-owned enterprise saddled with unpayable loans.

Two years later, as part of a turnaround strategy, the firm decided to dispose of its non-performing loans through SSAO and sell A-share stock on the Shanghai exchange.

To raise capital for the IPO, Guotai Junan cut a deal with SSAO to swap its bad loans, which had a book-value of 3.125 billion yuan (US＄ 405 million). In return, Guotai Junan received 300 million yuan (US＄ 38.9 million) in cash and shares worth an estimated 1.1 billion yuan (US＄ 129 million) in Shenergy Co. (600642.SH) and Dazhong Transportation (Group) Co. (600611.SH), while keeping 400 million yuan (51.7 million dollars) in debt on the books to be managed by Guotai Junan Investment.

SSAO, which has the sole right to trade state assets in Shanghai, approved the bailout under one condition: If Guotai Junan failed to go public before June 2003, the swapped assets would have to be returned to SSAO.
The deal turned sour for Guotai Junan when the Shanghai stock market slumped in 2001, temporarily quashing the firm’s hopes for a domestic listing. SSAO began pushing the firm to fulfill its obligations and return the swapped assets.

But the Shanghai government intervened, rescuing Guotai Junan.

Until that time, the firm had been one of the few brokerage houses with positive earnings for three consecutive years, and pressure was mounting for a public listing.

The government’s intervention allowed the two companies to sign the 2004 agreement to defer the return of assets to SSAO, eventually making it possible for Guotai Junan to proceed with its plan to file an IPO.