Problems And Countermeasures Of Directional Convertible Bonds As Payment Instruments

In November 2018,China Securities Regulatory Commission(CSRC)posted the paper of "CSRC Pilot Directional Convertible bond to Support the development of Listed Companies",which ruled that pilot the directional convertible bond to help the development of companies.The Xin Jin Gang company had completed the registration work of issuing directional convertible bond,which is the first company,marking this product fall to the ground.This essay uses both normative research and case study,taking xinjinggang as the object of research.It analyzes the problems and causes when xinjinggang company pays directional convertible bonds to shareholders of kuanpu,and comes up with the relevant impeccable advices to solve the above problems.For easing the cash stress,avoiding the drastic augment of asset-liability ratio and add flexibility in the merger and acquisition negotiation,Xinjingang selects to distribute the directional convertible bonds to the stockholders of the acquired firm Kuanukeji to pay 10% of the merger consideration.However,there are three problems in this process.First,the payment cost of interest of Xinjingang directional convertible bonds is high,which makes the company increase the financial burden when it has paid a large amount of cash consideration.Second,there is insufficient incentive for the targeted,which will hamper the higher profits and the integration of the Kuanpukeji.Third,there is information asymmetry between the Xinjingang and Kuanpukeji,and each company needs to negotiate after the merger.However,the term of directional convertible bond with embedded option does not effectively restrain the uncertainty risk.It is found that the above problems are caused by the progressive interest rate of 0.3% to 2% of the directional convertible bonds,the lack of batch unlocking arrangement for the lock-in period of the directional convertible bonds,and the one-time payment of the directional convertible bonds agreed by both parties,leading to the risks are borne by xinjinggang company.Therefore,this paper suggests that the company should set the fixed coupon rate as low as possible in the negotiation,add the batch unlocking arrangement in the directional convertible bond clause,and introduce the phased payment into the directional convertible bond clause,that is,pay the directional convertible bond by stages.This essay will enrich the theory of directional convertible bonds.It is helpful for quoted company that grant directional convertible bonds as payment instruments to make reference and optimization.