The Study On The Consequences Of Perpetual Bond Financing Of ZTE

Perpetual bond is a security uncertain of the maturity date,whereas the creditor having no right to determine the time when the principal will be paid can earn interest on a regular basis.Perpetual bond is a hybrid financial instrument expressed as a portfolio of "stock" and "debt".Whether to be identified as equity property or not depends mainly on whether there is a set of "deferred" and "redemption expiration" clause at launch.As a new long-term financing tool,perpetual bond can not only raise the proportion of equity without decentralized control,but also reduce the rate of assets and liabilities.It is a trend especially for enterprises which need to replenish liquidity but do not want to bear the pressure of high financial cost.However,the cost of the debt rollover is so high that the perpetual bond has a time limit,and it will hide the scale of corporate real liabilities and results in debt risk.The first sustainable medium-term note embedded option issued until 2013 in China.In 2018,the first issuance of perpetual debt expired,and the issuers face the dilemma of whether to get perpetual debt back.In February 2018,ZTE chose to redeem the 1.5 billion sustainable debt issued in 2015 on expire date.The research on the whole cycle of perpetual debt financing of ZTE will aid an understanding of its impact on the economic value of enterprises and provide guide to managers having financing needs.Based on this background,this paper selects ZTE as a case to study the economic consequences of perpetual debt financing.Firstly,it describes the research background and research significance of the article,then reviews and summarizes the research literatures on perpetual bond issuance and accounting recognition.Secondly,on the basis of defining the concept of perpetual debt and economic consequences,it follows the relevant theoretical basis.Thirdly,after introducing the status quo of the sustainable debt financing,this paper will focus on the issuing clauses of ZTE’s perpetual bond and the economic consequences of the sustainable debt financing.This paper studies the economic consequences of perpetual debt financing from four aspects: financial efficiency,financing cost,risk and market effect.Through the case analysis,it finds that the sustainable debt financing can optimize the debt structure and guarantee enterprise’s capital demand,but it will bring financial risk,credit risk or compliance risk;by using the event study method to analyze the announcement effect of perpetual debt financing,it find that the market has a negative effect on the issuance of perpetual debt but has positive effect on redemption;based on the optimal stop model,the paper measures the redemption cost of the perpetual bond,and find that the mechanism of interest rate jump is used as a cost constraint for issuing.Finally,this paper will provide feasible suggestions for issuers to take advantage of perpetual bond financing for the purpose to promote the healthy development of perpetual bond market.