A Case Study On Market-oriented Debt-to-equity Swap Of Wuhan Iron And Steel Group

In recent years,one of the prominent characteristics that concern the global world macro economy is the factor of uncertainty which is mainly caused by the frequent occurrence of such “black swan events” as the event of Brexit,Trump's success in US president election and the impeachment event of Brazil's president Rousseff.Moreover,the problems of aging population,European refugee crisis make the world economic recovery slow and diversified.Under this economic background,China,a country which contributes over 30 per cent in global economic increase,also faces much uncertainty in its economic development.There are two major issues that influence China's macro economy,which are the problems of firms' high leverage rates and banks' quick growth of non-performing loans respectively.These factors impede the economy growth and make the economy witness downturn pressures.With the dramatic increase of non-performing loans,commercial banks are experiencing great stress in dealing with non-performing assets,which makes it necessary to innovate methods of handling banks' non-performing assets.In September 2016,“Opinions on actively and steadily reducing the leverage ratio of enterprises” was published by the State Council of China,which indicates that a new round of debt-to-equity swap is introduced to the market.This article conducts a research on the debt-to-equity swaps of Wuhan Iron and Steel Group and China Construction Bank.First of all,this article makes a summary of domestic and foreign research documents about debt-to-equity swap,and analyzes the incentives of the present market-oriented debt-to-equity swap.Then,a comparison between the previous debt-to-equity swap in the last century and the new one is completed in terms of subjects,enforcement bodies,and pricing methods,which aims to emphasize the features and advantages of this new debt-to-equity swap.After that,taking the example of debt-to-equity swap between Wuhan Iron and Steel Group and China Construction Bank,which is the first case of state-owned enterprise supporting market-oriented de-leveraging,this paper provides a brief introduction of Wuhan Iron and Steel Group and introduces the favorable conditions of implementing debt-to-equity swap before elaborating the specific operating procedure and the actual effects of this debt-to-equity swap.This paper concludes that this debt-to-equity swap has great positive effects on firms' financial statements,state of operation,governance structure and social effect.Besides,it also has a positive impact on banks' non-performing assets disposal,operating management and risk control.What's more,the success of Wuhan Iron and Steel Group and China Construction Bank debt-to-equity swap also sets a good example for other companies.Moreover,this article also suggests four major problems to be solved which are the choices of convertible bonds,pricing mechanism of firm loans,guarantee of rights and interests for debt holders and the prospect of equity withdrawal respectively.Finally,based on the analysis of the case for Wuhan Iron and Steel Group,the conclusion of this article can be drawn that some problems do exist in the new debt-to-equity swap when the interests of all sides are maximized.Therefore,the policy of debt-to-equity swap should be implemented according to practical situations.In addition,some suggestions are proposed as to choices of target companies,guarantee of equity holders' rights exercise and equity withdrawal mechanism.