On Financing Risk Of Convertible Bonds

In November 2018,the China Securities Regulatory Commission issued the announcement of “Piloting Directional Issuance of Convertible Bonds for M&A to Support the Development of Listed Companies”.Convertible bonds once again became a hot spot in China’s capital market.Convertible bond,which combines the nature of bond,stock and option,plays a unique role in the diversified financing mode of China’s capital market.However,because the convertible bonds market in China is still in the initial stage of development,most listed companies lack the awareness of the financing risk of convertible bonds,and they do not have sufficient understanding of the prevention and response measures of financing risk of convertible bonds.Generally speaking,the motivation of convertible bonds issued by listed companies in China is more in line with “the Backdoor Equity Financing Hypothesis”,and its ultimate goal is converting into equity.Therefore,there are some problems such as the same issuance terms,the lack of early warning and monitoring of relevant financial indicators,which lead to higher financing risk of convertible bonds.Starting from theory,this paper describes the related concepts and connotations of financing risk of convertible bonds,and provides theoretical basis for identifying the financing risk of listed companies.On this basis,taking the typical failure cases of convertible bonds as the research object,this paper studies the issuing motivation,issuing terms and exposed financing risks of listed companies,and puts forward risk management suggestions.This paper enriches the research on the issues related to financing risk of convertible bonds,and provides case materials for listed companies interested in financing by convertible bonds.This paper selects Tangshan Steel’s Convertible Bond that failed to convert in 2007 as a case study object.Finally,the paper puts forward the risk prevention and countermeasure suggestions for listed companies.First of all,this paper explores the motivation of convertible bond issuance,and find that the complete realization of the motivation depends on the smooth conversion of convertible bond,and draw a conclusion that the motivation of Tangshan Steel’s Convertible Bond deviates from the failure of convertible bonds converting into equity and the result of fund withdrawal.Secondly,based on the fact that Tangshan Steel’s Convertible Bond financing failed,this paper analyzes its impact on shareholder wealth from the short-term market reaction.Then,this paper identifies the risk areas of Tangshan Steel’s Convertible Bond,and find that the main financing risks are interest rate design risk,issue timing risk,conversion price modification risk and maturity redemption risk.Finally,I put forward some suggestions against the financing risk of convertible bonds.This paper suggests that,overall,listed companies should establish an early warning system for financing risks.In response to the timing of the issue,it is recommended that the issuing company,should pay close attention to macroeconomic and capital market changes.In view of conversion price modification risk of the convertible bonds,it is recommended listed companies,according to the company’s own characteristics,rationally design the terms and balance the interests of the three parties.In view of the risk of redemption due,it is recommended listed companies use its strong bonds financing ability to “repay the old bonds with new bonds”.The innovation of this paper is to avoid the disconnection between theory and reality by analyzing the actual cases of Tangshan Steel’s Convertible Bond.This paper uses the method of reverse argumentation,and selected the first maturity redemption convertible bond in China.It is often more convincing to extract the financing risks and put forward corresponding risk warning and response measures by "failed" convertible bonds than "successful" ones.