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The terms of the bond issue convertible design: perspective based on the benefits of control

Author: WangDongNian From: www.yourpaper.net Posted: 2009-04-01 08:43:26 Read:
A convertible bond issue terms design
The convertible bond is an extremely complex derivative products, it gives the right to bondholders in a certain period of time according to a certain ratio (conversion ratio) bonds converted into common stock of the Company. In addition to the general-to-equity, convertible bonds also contains a number of path-dependent options. These options: under certain conditions, the holders of the bonds in accordance with a certain price sell back the option of the issuing company (the sale back right), the issuer under certain conditions, to adjust the conversion price of the option (conversion price adjustment right), and the issuer to redeem the convertible bonds under certain conditions, options (call options).
Design of the terms of issue of convertible bonds, mean the use of convertible bond financing issued by the company said, it is a clear definition of the rights and obligations of the issuer and investors, more precisely, is clearly defined tradable shareholders, non-tradable shareholders among investors, the profit and loss. Benefits of control, designed according to the 2000 to 2004, China's 35 listed companies in terms of issue of convertible bonds, convertible bonds five principal terms of the following analysis:
(A) the design of the terms of the bond
For investors. Convertible bonds gain characteristics can vividly described as "under the bottom, on the top". The "bottom" is very clear, is the pure bond value of bonds. The terms of the bond is limited, mainly including the issue of the amount issued for a period, and the coupon rate of three pure bond value of the convertible bonds contain elements which determine the method of payment of the coupon rate is a key factor affecting the terms of the bond. From the upward trend in the total amount of convertible bond issues, and a very rapid growth. Which in 2000 was 28.5 billion yuan, 4.15 billion yuan in 2002, in 2003 was 18.55 billion yuan, 20.903 billion yuan in 2004. From the general characteristics of the convertible bond issue amount is allotted Merchants Bank bonds 6.5 billion, the youngest Eagle bonds only 2.5 billion, a difference of 26 times; 35 convertible bonds average issued $ 1.327 billion yuan. The issue deadline set, the 31 selected, only four selected three years. Convertible bonds in the 2000-2004 period, the coupon rate and payment changes in the way the most interesting. Convertible bonds issued by listed companies in 2000 and 2002, the annual interest rate is lower, between 0.51% -1.8% interest and paid once a year. Convertible bonds in 2003 and 2004 to determine the method of payment of the coupon rate of occurrence of a significant change, which in 2003 issued 16 bonds 12 selected floating rate increase every year, only four choices a fixed interest rate; addition, there are eight additional terms of the interest rate maturing compensation. 12 bonds issued in 2004, all the selected floating rate increase every year the seven bonds attached to the terms of the interest rate maturing compensation.
Allotted and issued for a period of constant case of convertible bonds from a year to pay a fixed interest rate change in floating interest rates increase every year maturity compensation, significantly increase the financing costs of the convertible bond issuers. What is the cause of convertible bonds interest rates and its Payment change? By the state-owned shares and full circulation is expected because of China's stock market, investors are not optimistic about the prospects of the stock market, share prices continuing to fall, resulting in a market issued convertible bonds with stock options characteristics blocked investors to subscribe for the enthusiasm is not high. A success rate soared, the Yanjing bonds underwriting brokerage the underwriting balance of more than half. The face of the grim situation of the convertible bond market order to achieve the objective of maximizing shareholder financing in the holding of non-tradable shares, the issuer ignore the interests of the holders of tradable shares, significantly modify the issuance program. In order to attract investors, the design of the terms of the bond, with a coupon rate of increase every year and due compensation. Consider the WTO and interest rate fluctuations factors, in the design of the convertible bond terms in terms of the interest rate fluctuations, it is necessary to protect the interests of issuers and investors. But due to the convertible bond has options, convertible bonds interest rates are usually lower than the pure bond rates. Foreign convertible bonds issued to only junk bonds with high interest rates relatively high, and the credit of our convertible bonds and convertible bonds due for a maximum period of five years, subject to the risk of changes in interest rates is relatively limited. From the point of view of the interests of all shareholders to maximize the use of low-cost financing is the rational choice. However, in the case of non-tradable shareholders have control over the issuer by the coupon rate and payment changes increase financing costs will affect the value of the cash flows of the holding of non-tradable shareholders, but the control of the interests are not affected holding non-tradable shareholders cash flow loss in value to the interests of the compensation of the control over the final no substantive effect on the interests of the shareholders of the holding of non-tradable shares; tradable shareholders only cash flow value has no control over interest, and ultimately damage to the interests of the holders of tradable shares.
(B) The design of Conversion Terms
Conversion Terms of involving the conversion period, turn the three elements of the stock price and the initial premium rate. Our "Interim Measures for the Administration of the convertible bonds under the listed companies to issue convertible bonds, issued six months after the end of the holders at any time in accordance with the terms agreed to convert the shares." 30 set issued six months after the end of the conversion period, only five conversion period set in issue 12 months after the end of the 35 listed companies issuing convertible bonds in 2000-2004. Determined and consistent with prevailing international, our initial conversion price of the convertible bonds issued one month before or the week the average closing stock price, and then go up a certain percentage of the conversion price. Quickly dropped to 2003 in order to attract investors, to ensure the successful issue of convertible bonds, the issuer of convertible bonds of the initial premium rate given the very low, in 2000, the average rate of 4.44% of the initial premium; 4.8% in 2002; 1.0257%; 1.3% in 2004. The general characteristics of the initial premium rate convertible bonds from 35, the highest initial premium rate the Yanjing bonds 10%, and the initial premium rate of between 0.1% -0.5% 19. Low initial premium rate makes gradually transformed into a disguised form of additional convertible bonds. Against the interests of the holders of tradable shares. Within the approved facilities, the initial premium is low, the number of convertible and more pressure on the large expansion of the outstanding shares.
The end of 2004, China's convertible bond market trading convertible bonds 31, 31 convertible bond issue size and the initial conversion price of analog, all converted into shares if the bonds due and outstanding shares of capital The rate of increase is much higher than the total share capital increase (as shown in Figure 1); addition, taking into account the conversion price may be more than once revised downward, the expansion ratio of the outstanding shares of the share capital will increase accordingly. Minsheng Bank's convertible bonds, for example, the total size of $ 40 billion, the initial conversion price of 10.11 yuan, as all conversions, the A shares in circulation will be increased by 39,564.79 million shares, accounting for 52,325 shares outstanding capital stock of the Minsheng Bank 75.61%, while only 15.30% increase in the total share capital of the Minsheng Bank. Listed companies to issue convertible bonds to refinance, because of the holding of non-tradable shares when the return on investment projects can not compensate for the dilution of performance due to capital expansion, the interests of the holders of tradable shares along with transfer the debt-equity swap, will once again be infringed; control over the interests of the shareholders' equity is not in circulation, the controlling shareholders of non-tradable shares * as well as the value of the cash flow, but do not have a substantial impact.
Back the terms of the sale terms and conversion price, especially downward revision the (c) linkage design
The terms of the sale back a security for investors, when the stock price is too low, extremely slim possibility of conversion, the investment can be in the hands of the bonds at the agreed price sold to the issuer; protected to a certain extent the interests of the investors, the investors a way to transfer risk to the issuing company. Although the terms of the conversion price, especially downward revision issue people have a right, but its main purpose is to protect investors in the holding period, when the underlying stock prices continued to fall and not be able to exercise their conversion rights, still in the convention point in time to reset the conversion price of the stock price at the time, prompting the adjusted conversion price is close to the convertible bond investors are encouraged to choose the conversion to profit. Usually sell-back is not a way to achieve the value of convertible bonds to investors willing to accept, but it is important, when issuers of convertible bonds as a "backdoor equity financing, sale back occurred more issuers are unwilling to accept results. Although the terms of the conversion price, especially downward revision is the issuer has a right, but not to say that the set conditions, the issuer must perform. In no sale back pressure. The Issuer will not take the initiative to the downward adjustment of the conversion price. Only when the issuer face sale back pressure will amend the conversion price, the convertible bonds worth more than sell-back price, in order to lure investors to abandon the sale back right.
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