Case Study On Market-based Debt-to-Equity Swap Of China Railway

In recent years,China’s economy has gradually moved from high growth to a new normal.Under the dual role of structural and cyclical factors,the development of China’s real economy has encountered unprecedented challenges.The debt burden of the corporate sector has been increasing and the leverage ratio has always been high.In order to prevent the transfer of risks from corporate debt through the financial system to systemic financial risks,China has issued guidance documents on market-based debt-to-equity conversion since 2016 to encourage the active participation of enterprises with high debt burdens.By converting bank debts into equity of the subject enterprises,the financial pressure and debt burden on the target company is reduced,the financing structure of the enterprises is optimized,and the healthy development of market players is promoted,thus enabling China’s supply-side reform policy to be effectively promoted.Given that China’s market-oriented Debt-to-Equity Swap is in its initial stage,there are relatively few implementation cases that can be referred to.Many enterprises with heavy debt burdens have little understanding of the scheme and impact of market-based Debt-to-Equity Swaps,resulting in a low willingness to participate.Therefore,through case studies,the implementation process and impact of market-based Debt-to-Equity Swap can be organized and analyzed,which can provide more intuitive experience for enterprises and institutional investors who are willing to implement Debt-to-Equity Swap and increase their enthusiasm to participate in Debt-to-Equity Swap,as well as provide theoretical support for the domestic Debt-to-Equity Swap market.It also provides theoretical support for the domestic debt-to-equity market.It is of great practical significance for China to smoothly promote the process of market-based Debt-toEquity Swap.Based on this,China Central Railway Company,the first leading central enterprise in the construction industry to implement market-oriented Debt-to-Equity Swap,is selected as a case study.On the basis of the relevant literature at home and abroad,we summarize the current research status and theories of Debt-to-Equity Swap,analyze the profile of the participating entities and the motivation of Debt-to-Equity Swap,and introduce in detail the specific implementation plan of China Central Railway for market-oriented Debt-to-Equity Swap.The study then focuses on the impact of the Debt-to-Equity Swap on the market value,financial status,equity and governance structure,and corporate risks of China Railway,and analyzes the problems in the implementation process.The study found that:（1）the market reaction to the Debt-to-Equity Swap of China Railway was negative,and the capital market’s recognition of the Debt-to-Equity Swap was limited in the short term.（2）The Debt-to-Equity Swap of China Railway has effectively solved the problem of high debt ratio of the enterprise and generally improved the solvency,profitability and operating capacity of the enterprise.（3）China Railway’s internal equity structure and governance structure have been optimized.（4）China Railway effectively reduced the financial risk and the probability of debt default through the market-based Debt-to-Equity Swap,and eased the operating pressure of the enterprise.（5）In the process of Debt-to-Equity Swap,there are problems such as the high proportion of governmental implementing agencies,the difficulty of guaranteeing the exit interests of implementing agencies,and moral risks caused by different interested parties.From a comprehensive analysis,the improvement effect of this Debt-to-Equity Swap of China Railway on the enterprise as a whole is more significant.Finally,according to the implementation situation and problems of the case,corresponding suggestions are made for social capital participation,equity exit channels and restrained subject behavior,which provide theoretical experience and reference direction for the subsequent promotion of market-oriented Debt-to-Equity Swap in China.