A Case Study On Market-oriented Debt-to-equity Swap Of China Railway

At present,China’s economy has shifted from high-speed development to high-quality steady growth.As an important measure to reduce corporate leverage and prevent financial risks in financial supply-side reforms,market-oriented debt-to-equity swaps have been vigorously stimulated and supported by the government.Since the government strongly promoted a new round of market-oriented debt-to-equity swaps in October 2016,a large number of companies hope to reduce the company’s asset-liability ratio through market-oriented debt-to-equity swaps so as to achieve a more sustainable and healthy development.In this essay,China Railway Corporation,the first state-owned construction company that completed market-oriented debt-to-equity swaps,are selected as the case study object.Firstly,it introduces the definition,characteristics and operating mechanism of market-oriented debt-to-equity swaps in depth.At the same time,it compares two round of debt-to-equity swaps,then forms an accurate and comprehensive grasp of the current situation of our country’s market-based debt-to-equity swaps.Secondly,based on the classification of domestic and foreign debt-to-equity related literature,this case is investigated from three aspects: China Railway’s comprehensive strength,the conditions,the operation models and implementation process of this debt-to-equity swap.The comprehensive strength shows that China Railway has extremely strong capital and technical strength.Its main business is concentrated but the profit margin is low.The financial situation indicates that China Railway’s asset-liability ratio is clearly at an excessively high level in the civil engineering and the financial burden of the enterprise is too heavy,which led to China Railway being well-suited for debt-to-equity swaps.At the same time,China Railway has the internal and external conditions to implement market-oriented debt-to-equity swaps,making the process of debt-to-equity swaps smoothly and with little resistance.In the analysis of China Railway’s debt-to-equity conversion case,it has achieved a combination of qualitative analysis and quantitative analysis.It has carried out a comprehensive and detailed analysis and evaluation of China Railway’s debt-to-equity conversion in terms of motivation,case model and subsequent implementation effects.The motivation analysis includes two dimensions of internal and external factors.The case model analysis includes analysis of the case’s transaction model,implementation method,pricing mechanism,and exiting mechanism.Compared with the previous roundof policy-based debt-to-equity swaps,all aspects of China Railway’s model appeared marketable and feasible.China Railway’s debt-to-equity swap model can be summarized in three steps: in the first step,the implementing agency increases the cash or debt of the subsidiary and obtains the corresponding shares in the subsidiary;in the second step,China Railway issues shares to the implementing agencies to purchase the equity of its subsidiaries;the third step is to withdraw the shares of the institution.Every step in the transaction process is open,transparent,and market-oriented which requires the participation and cooperation of multiple parties to maximize the protection of each party’s interests.In the follow-up implementation results,the financial data shows that China Railway Corporation’s parent company’s asset-liability ratio has decreased,and the reduction in financial expenses has led to an increase in net profit.This is also the most significant impact of this debt-to-equity swap.Then the impact of stocks both in Shanghai Stock Market and Hong Kong stock market on the company’s short-term stock price is not self-evident,which may be related to investors’ views on debt-to-equity swaps.Finally,the impact of debt-to-equity swaps on ameliorating the long-term operation of the company is analyzed from the changes in management costs and research and development costs.It is found that the current debt-to-equity swap has not significantly optimized the internal management of the enterprise,which provides an entry point for subsequent improvement.At the end of the essay,combined with the characteristics of China Railway’s market-oriented debt-to-equity swap case,several conclusions are drawn,including the two levels of requirements for market-oriented debt-to-equity conversion,China Railway’s advantages and disadvantages of the model,etc.Then,based on the experience and shortcomings of China Railway market-oriented debt-to-equity swap case,the paper propose some specific implementation suggestions for other companies which intend to implement debt-to-equity swaps,investment institutions,and governments.This paper mainly uses literature research method,case analysis method,comparative analysis method,event research method and other research methods.The research case is time-sensitive and typical,and the research perspective is innovative.In the study of stock prices,the stock returns of both in Shanghai Stock Market and Hong Kong stock market on the announcement date of China Railway Group’s debt-to-equity swaps were announced,in an effort to obtain the most comprehensive and complete market feedback.The full-text analysis is comprehensive and in-depth,and provides a worthy reference model for central enterprises to implement market-orienteddebt-to-equity swaps.