The immediate winners from a financial shuffle by Yanzhou Coal in its Australian associate, Yancoal Australia, are the workers at seven coalmines scattered across Queensland, New South Wales and Western Australia because the deal should mean that their jobs are safe.

Less certain about their status in what is essentially a debt-for-equity swap are minority shareholders in Yancoal Australia, a business largely made up of assets once owned by Felix Coal and Gloucester Coal.

The problem, which will probably have its day in court or be the subject of an inquiry, is that minority shareholders in Yancoal Australia are far from happy with the proposal as it now stands.

For non-financial readers the Yanzhou/Yancoal situation is likely to prove tortuous to follow so, before getting to the detail, the name of the game seems to be that Yanzhou wants to simplify its Australian business by swapping debt owed to the Chinese parent for an increased equity stake.

A first attempt at simplification was made in the middle of last year when Yanzhou lodged what was described as an “indicative, non-binding proposal” regarding the possible privatisation of Yancoal Australia.

In other words Yanzhou, as far back as 18 months ago, was flagging its concern about the structure it had created through the takeovers of Felix and Gloucester, and no doubt very unhappy with the fact that it had spent around $5.6 billion on the acquisitions.

For unknown reasons, perhaps because minority shareholders were not happy with the terms of the first proposal, Yanzhou withdrew the suggestion in March this year – but obviously believed that full ownership remained the best option for Yancoal Australia.

What must be particularly appealing about owning all of Yancoal Australia is the ability to streamline the business and the elimination of the need to publicly report every development, or continue to air the heavy losses, such as the $192 million lost in the six months to 30 June.

The latest poor result from day-to-day operations is small beer alongside the collapse in the capital value of the business which can be measured through the Yancoal Australia share price that has fallen by 91.5% from $1.70 on listing day (June 28, 2012) to recent trades at 14.5c.

To put that share price into perspective it needs to be remembered that the acquisition of Felix and Gloucester cost around $5.6 billion whereas the listed business today, Yancoal Australia, is valued on the stock market at a mere $144 million, and that means Yanzhou’s 78% equity interest in the Australian business (before counting a $1.8 billion debt) is now worth around $112 million.

Yanzhou is not alone in taking a hit from its exposure to Yancoal Australia, because according to the latest annual report, there were another 2163 smaller shareholders in the stock, with most of them (1170 in total) owning less than 1000 shares.

Some of those people will not be impressed with the capital shuffle proposed on Monday by Yanzhou which consists of a renounceable rights issue of subordinated notes designed to raise up to $US2.3 billion ($A2.64 billion), with Yanzhou also offering up $1.4 billion in extra funds if needed by Yancoal Australia.

Yanzhou has said it will subscribe for all of the notes to which it is entitled, which amounts to around $US1.8 billion, with that money going into Yancoal Australia already earmarked to retire the debt it owes to itself – hence the description of the deal being a debt for equity swap because Yanzhou retires debt and gets extra equity in Yancoal Australia.

The terms of the deal are complex but the key points are:

• Yanzhou is entitled to 18 million of the notes which can, at some time in the future, be converted into 18 billion new shares in Yancoal Australia, enough to theoretically give Yanzhou control over close to 99% of Yancoal Australia;
• Minority shareholders can take up their entitlement to the notes being issued but at a price;
• In the case of Yancoal Australia’s second biggest shareholder, Hong Kong-based Noble Group, that price is around $300 million.

Noble’s position is the same as other minority shareholders in Yancoal Australia. It faces a decision of whether it should tip more money into a business that is already controlled by Yanzhou, and which looks like being even more tightly controlled after the deal is complete.

A debt-for-equity swap can be a useful step for a business under pressure to service its debts, but the Yanzhou deal as it now stands will almost certainly be the subject of a legal challenge from minority shareholders who feel oppressed by the terms.