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Influential Factors for listed companies issuing convertible bonds

Author: YuLiFeng From: www.yourpaper.net Posted: 2009-10-09 18:00:24 Read:
[Abstract] The convertible bond is a bond market financing varieties triple characteristics of both bonds and shares and conversion options. Because of its complex nature, as the main body of the issuance of corporate bonds in China's first pilot, the listed companies should be thoughtful consider various factors before deciding whether to issue or how the issue. These factors include the understanding of the nature of the convertible bonds, the issue of motivation select, the terms of issue of the design and the formulation of the issue price.
Listed Companies [J]; financing channels; issue; convertible bonds; considerations
Convertible bonds (hereinafter referred to as the convertible bond) is a bond corporate bonds have unique characteristics. With ordinary bonds, it can be converted into the issuing company's stock under certain terms and conditions. Since the 1843 New York Erie Railway Company issued the world's first convertible bond financing more than 100 years of history, it has played an important role in the capital markets. "Issuance of securities of listed companies in China: The term" securities, securities varieties in the following: (a) stock; (b) of convertible bonds; (c) other varieties recognized by the China Securities Regulatory Commission. This is clearly the beginning of the pilot varieties of corporate bonds from convertible bonds.
Undoubtedly the enterprise point of view but from the practice of Chinese enterprises, as the bond market is very important and active bonds, in its short history of issue, highlighting the many systems company, one of the most significant of convertible bonds awareness and understanding of extremely shallow, resulting in conversion failure, damage to their own values. The resurgence of the listed companies on the occasion of the convertible bond financing boom, this paper, from the point of view of the listed companies, to explore the issues that need to carefully consider the issue of the convertible bonds of listed companies to help develop the the perfect convertible bond financing strategy.

A deep understanding of the convertible bonds attribute characteristics

Any one thing, understanding its nature, the more profound, the easier it is to manipulate and control it. Convertible bonds can lower the cost of financing to the operation of the financial issue facing problem is quite complex. In stock before the conversion, the company faced management problems; bonds conversion rights exercise period, investors conversion or the conversion speed of the company is facing. Otherwise, the conversion at the same time there are bonds and stocks, is likely to cause confusion, without conversion, the company will face serious financial risk, and so on. These complex issues are caused by the convertible bonds attributes.
There are many different descriptions, at home and abroad for the definition of convertible bonds understand its definition helps us to understand the characteristics of convertible bonds. The foreign scholars typical definition is the American scholars Bada inside. S. Aisi Hua, his definition of the convertible bonds and hybrid financial instruments with equity features for both fixed income characteristics. For domestic scholars, I believe that the point of view of Yang Ruyan very special. He convertible bonds as the parties to the transaction on the market each come up with their own endowments transactions of a process, and from the the convertible bond angle of the internal structure of the proposed convertible bond definition: to bonds is the issuer group rights (claims and options) with a group of investors the right to exchange tools issuer in exchange for the right to include the company's income distribution rights and the conversion option, investors in exchange for the right to include the rights of current consumption and Another option (the sale back right).
These definitions, different emphases, but apparently are convertible bonds pay attention to attribute characteristics. Both debt and visible attributes of convertible bonds, shares and conversion option triple feature is a complex financial derivatives. Listed companies to issue convertible bonds from which the properties of the complex, after considering its own processing and handling ability convertible bonds, and then decide whether to issue and how the issue.

Second, recognizing the advantages of a convertible bond financing

Convertible bonds over a long period of development, the increasingly important role to play in financial markets. Intends to issue the convertible bonds of listed companies should be a comprehensive understanding of the convertible bond financing scientific advantages, according to the capital structure of the enterprise goals and funding demand conditions determine whether the amount of the convertible bond financing and financing. To sum up, the convertible bond financing advantages in the following areas:
(A) low financing costs. The convertible bond is a common bond with the combination of the call option, its value includes the value of the bonds and the value of the options, and therefore theoretically the coupon rate of the bonds is lower than ordinary bonds. Practice has proved that also true. As the the Baoan issue in the end of 1992 convertible bonds, the period of three years, the coupon rate of 3%, while bank deposit rates during the same period in more than 10.8%, which is not too long-term savings to preserve and increase supplement rate. 2002 Shanghai Hongqiao Airport convertible bonds for five years, the coupon rate of 0.8%, much lower than the same period in ordinary bond interest rates. Plus "tax shield" role on the interest on the debt, lower interest rates and the actual burden of enterprises, which makes the issue of the convertible bonds financing the cost of capital is lower than the cost of capital for equity financing, reducing the company's financial burden.
(B) to obtain the conversion premium. In general, the reality of the stock market price of the convertible bond conversion price than the company, which implies to reflect the value of options. : 5 February 12, 2006 G Tangshan Iron and Steel issued bonds with warrants, the provisions of the exercise price not less than the average price of 20 trading days before the prospectus and the first trading day average price of 1.2 times. Due to the placement of shares, issuance impossible to exceed the market price, and the issuance will raise the stock price declines, seems greatly highlight the advantages of "premium" bonds.
(C) Conversion before and after the formation of the different capital structure, corporate strategic planning can be flexibly adjusted. Convertible bonds into stock as liabilities exist, the capital structure of the company is a state; conversion, all of these debt into capital, the company's capital structure change of corporate interests, the equity increase in the proportion of liabilities reduced the proportion of the size of the company and its strength, has created favorable conditions for subsequent funding. The capital structure is the core content of the company's management, affect the value creation capabilities. The success of the convertible bonds issued can allow enterprises to easily achieve the conversion of the two capital structure, capital structure with clear objectives planning company, the issue of the convertible bonds to adjust the company structure is very superb management skills.
(D) enhanced funding flexibility. The newly issued corporate bonds issued pilot approach companies to issue bonds have not done the restrictive provisions of the financing for use. The provisions of Article 13, the issuance of corporate bonds to raise funds as long as the purposes approved by the shareholders 'meeting or the shareholders' meeting and in the interests of national industrial policy can be. Than other debt of listed companies, the degree of freedom of the use of resources on the loose. In addition, the company went bankrupt, the debt settlement order followed by silver loans and other debt, convertible bonds, apparently issuing convertible bonds will not affect the company's capacity to repay other debt. In addition, the convertible bond investors is the potential shareholder purchase bonds look forward to more of the company's share price rose, consistent with the interests of the company, is willing to accept less restrictive terms of debt covenants. These aspects are integrated together, so that the issue of the convertible bonds of listed companies have a greater flexibility in the use of funds.

Third, the the express company issued convertible bonds motivation

Research at home and abroad, the Company issued convertible bonds motivation can be classified into four types. First, the delayed equity financing motive. People found based on the theory of information asymmetry, equity financing will pass out negative information about the company funding constraints, causing the stock issuance is unsuccessful or can not obtain the expected premium adverse selection costs, and the issue of ordinary bond financing will lead to higher financial pressure, this when the company can use the convertible bonds to the delay in obtaining equity capital. So-called delayed equity financing is the essential aim remains that these companies issue convertible bonds to equity capital after the debt-equity swap, but borrowed convertible bonds as an indirect mechanism. The terms of issue of the convertible bonds will be special emphasis on the terms of the convertible bond redemption, so that the company can force conversion. Second, the transfer of risk motivation. The research shows that companies with high operational risks and financial risks are likely to face the high cost of the securities issued standard, however, the value of the convertible bonds are less sensitive to the risk of the issuing company. Because the value of convertible bonds contain a common bond value, conversion value, and option value. When the company has a higher operational and financial risks, can reduce the value of bonds in part of ordinary bonds, and fluctuations in the value of the stock is expected to increase the value of the option premium will be more convertible bond is overall The value of the company's risk relationship is relatively sparse. The American scholars Donald Chew (1987) that the smaller the size of the company, the faster it grows, the more we tend to issue convertible bonds. Third, the motivation to reduce agency costs and protect the interests of shareholders. The theory of equity capital no fixed payment pressure management to the pursuit of self-interest and abuse of the pressure of debt service and debt capital, will reduce managers discretionary cash, thereby limiting its pursuit is not conducive to the interests of the shareholders behavior. However, debt financing alone will have another problem, that the creditors and shareholders of a conflict of interest in the investment decisions. (This is called asset substitution to produce investment will reduce the company's cash flow, and reduce the company's ability to repay principal and interest due, and shareholders bear only limited liability, the expense of the interests of the creditors in exchange for the incentive to maximize its value effect), if the creditor insight into shareholders intent will require higher returns, thereby increasing the cost of capital, debt and reduce the overall value of the enterprise. The convertible bonds can be an effective solution to this contradiction. With the increase in the risk of a project, not only the company's shareholders and the company convertible bond holders expected return will increase. Visible, convertible bonds due to the characteristics of the bonds, which can effectively reduce the misuse of funds of management behavior, while due to its equity features, which can effectively reduce the asset substitution effect due to the bond financing. Fourth, the continuous financing motive. Continuous financing motive Company issued convertible bonds to reduce financing costs and avoid excessive investment. The study assumes that the project has two phases. In the beginning of the first phase of the project, the company is profitable, and, at this stage there at the end of the investment options. Company issued convertible bonds to finance a project for the second phase, this phase of the project investment value investors will not conversion, the company can still be held by the lower cost of debt capital, the company faced financial pressure compared Other financing methods are small. The finance motive based on the company's strategic planning. Listed companies only on the basis of clearly identified their own financing purposes to scientifically determine the terms of issue of the convertible bonds, so that not only can successfully finance but also contribute to the realization of the company's strategy.
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