Research On The Application Of Directed Convertible Bonds In Equity Acquisition

In November 2018,China Securities Regulatory Commission announced that "CSRC Pilot Directed Convertible Bonds as Payment Instruments in Mergers and Acquisitions to Support the Development of Listed Companies",strongly supporting listed companies to issue directed convertible bonds as a payment tool in M&A".By the end of 2020,about 50 listed companies had planed to use directed convertible bonds as a payment tool in equity acquisition,of which 21 companies succeeded.However,CSRC issued the announcement"Administrative Methods of Convertible Corporate Bonds" on December 31,2020.The new regulations mainly include:It is forbidden to revise downward the conversion price of directed convertible bonds;Directed convertible bonds cannot be transferred in public;Shares converted from convertible bonds cannot be transferred within 18 months from the date of issuance of convertible bonds.These restrictive requirements make the payment scheme of directed convertible bonds less attractive.Since the new regulations were issued,the number of cases of listed companies using directed convertible bonds as payment instruments in equity acquisition has dropped sharply.At present,only Huadian Power International Corporation Ltd.has successfully issued directed convertible bonds to purchase minority shareholders’ equity in its subsidiaries.The main purpose of the acquisition of HDPI is to help the institutions implementing the debt-equity swap realize capital withdrawal.Debt-equity swap is an important plan implemented by HDPI in 2019.In order to optimize the capital structure of the enterprise and reduce the company’s interest-bearing liabilities,HDPI allowed its subsidiaries,Inner Mongolia Mengdong Energy Co.,Ltd.and Tianjin Huadian Fuyuan Thermal Power Co.,Ltd.,to obtain cash capital from the implementing institutions of debt-to-equity swap,CCB Investment and BOCG Investment,and used it to repay the debts of financial institutions,so as to realize debt-to-equity swap.In March 2021,HDPI implemented the Capital Increase Agreement and officially announced that it would purchase minority shares held by CCB Investment and BOCG Investment using shares and convertible corporate bonds.Therefore,this paper takes HDPI as the case study object and conducts an in-depth study on the the application of directed convertible bonds in equity acquisition.The research content of this paper is as follows:First,this paper analyzes the motivation of using directed convertible bonds as payment instruments in the process of equity acquisition by listed companies;Secondly,by studying the operating conditions and unique advantages of HDPI,this paper explores the typical characteristics that issuers of directed convertible bonds should have under the current policy background.Then,this paper summarizes the risks that listed companies may face in the process of issuing directed convertible bonds to purchase equity and the corresponding solutions;Finally,this paper uses comparative analysis to observe the differentiated impact of directed convertible bond payment,cash payment and stock payment on the financial performance of listed companies.At the same time,the event study method is also used to explore the impact of this transaction on the stock price volatility of listed companies,and then speculate whether the market has a positive attitude towards this event.The results show that listed companies are more inclined to use directed convertible bonds as payment instruments when the stock price is low and monetary funds are limited.The main advantages of directed convertible bond payment are that unlike equity payment,it is more conducive to avoiding the rapid dilution of equity,and in contrast to cash payment,it is conducive to reducing the liquidity pressure of listed companies.Meanwhile,in terms of its clauses,directed convertible bonds can better balance the interests of both sides of the transaction to facilitate the transaction.In the context of the new regulations,the risk of minimal conversions of directed convertible bonds is rising.Listed companies need to have broad development prospects and strong financial strength to deal with the principal and interest repayment of convertible bonds.Besides that,only when investors believe that the stock price of the listed company can go up with high probability,they are willing to complete the transaction,in order to obtain greater returns through conversions of bonds into stocks in the future.During the preparation period for issuing directed convertible bonds to purchase equity,listed companies can reduce the concerns of the regulators and the counterparties by raising the coupon rate of directed convertible bonds,setting up the mandatory conversion clause and promising high percentage dividends,which is conducive to the smooth implementation of transactions.In summary,compared with traditional payment methods,directed convertible bonds can more effectively weaken the negative impact of this transaction on the company’s financial condition.Meanwhile,the market has a positive evaluation on this acquisition.Finally,this paper puts forward some suggestions for improving the application of directed convertible bonds in equity acquisition from the perspectives of listed companies,counterparties and regulators,hoping to provide some inspiration and reference for other listed companies planning to purchase equity in the selection of payment schemes.