The government will transfer the waterworks to GDE, which will then sell it to infrastructure company GDI, one of GDE's listed subsidiaries in Hong Kong. The creditors want Guangdong to sweeten the deal by injecting more assets, such as a provincial toll-road operator. They will sell non-core businesses, take on new debt and ask GDE to subscribe to a rights issue. Heavy loans weigh down GDI and Nam Yue, but they are not as badly off as Guangnan, whose assistant general manager, Li Ruihua, is being sought in Hong Kong for alleged fraud. Uncertainty about the ability of the companies to raise fresh funds and the valuation of the GDE preference shares explain why estimates of the banks' haircut vary so widely.
Analysts expect a compromise.
The banks cannot escape some responsibility for the debacle. Local officials issued loan guarantees, but Beijing has said it will not honor these pledges unless the loans were registered with the national government. Most GDE loans are backed by local-government guarantees, but are not registered in Beijing. Only the second-tier companies will struggle. China, after all, is still growing despite the Asian Crisis.