Differences between China and the U.S. Analysis of Convertible Bond Financing.doc

differences between china and the u.s. analysis of convertible bond financingpaper keywords: convertible bond financing companies abstract: in recent years the use of a global convertible bond financing has grown rapidly, the paper off of the convertible bond financing in the variance analysis, found that chinas use of the performance of a convertible bond financing features of the irrational hope of convertible bonds to be taken way of financing businesses can learn a lesson, in order to improve chinas convertible bond market financing efficiency. since 1843, new york, usa erie railway company issued the worlds first convertible bonds, to december 31, 2001, 38 countries in the global market, issuance of convertible bonds, outstanding bonds and more 2,300 species, the total amount of more than $ 400 billion, which accounted for about 43% of the u.s. in recent years the united states the use of the rapid development of convertible bond financing, financing in 1996 amounted to $ 27.8 billion in 2001, the amount of financing up to $ 104.5 billion, while chinas use of bond financing is convertible into 90 years later, with the establishment of the stock market began to .2003 chinas use of convertible bond financing to reach 18.55 billion yuan, accounting for the total year capital markets 22.86%, for the first time beyond the the issuance and allotment of new shares, a listed company to refinance the preferred method. strictly speaking, the convertible bond is the product of highly developed capital markets. chinas convertible bond market has grown rapidly in recent years, but in practice, companies use convertible bond financing, there are certain blindness. with the united states use of convertible bond financing of successful experience, we believe sino-us in the issuance of convertible bond financing purposes, the main issue of the distribution range of industries, distribution contract design, convertible bonds, awareness of the risks, there are differences, following a detailed discussion. first, the purpose of convertible bonds existing differences convertible bonds listed companies to provide a new financing tool, it is the bridge bond to stock conversion is leveraged capital structure adjustment of listed companies to issue convertible bonds equivalent to a delay of equity financing, the issuance of convertible bonds when it received funding, but only in the implementation of conversion of convertible bond holders to increase when the stock at a conversion price often than the issue of new shares while the price is higher, which allows companies to obtain the indirect benefits of the stock issued at a premium, while conversion is a gradual process of equity dilution will not be as fast as the issuance of new shares. u.s. companies use convertible bond financing has its specific background in the stock market or a cyclical downturn because of listed companies, industries, products and other reasons being poor benefits, the price is relatively low, while there are benefits of a better future new projects need financing, such as at the time allotment or issue of new shares, issue price is undoubtedly very low, the companys financing costs are too high. listed companies to issue convertible bonds, and the conversion price was higher than the price, so that one can reduce financing costs and improve future income; and as long as business is successful, the debt can be converted to equity, will greatly enhance the strength of the company by the amount of financing, the conversion price, conversion and other matters detailed term objective of financial analysis, as far as possible to achieve good returns when the investment project , stock prices rose, the conversion is just the right period to ensure a smooth implementation of the conversion, while chinas new round of convertible bonds based “financing boom”, and can not get rid of “financing misappropriating” the shadow of listed companies interested in the issuance of convertible bonds, simply because at this stage the allotment and issuance have been spurned by investors, it is difficult a lot of misappropriating. issuance of convertible bonds can be combined with other financing sources to raise funds to avoid the social security funds turned over to the councils obligations to those issued convertible bonds listed companies tend to have a strong “money desire”, and some companies simply give up the allotment or issuance, select issuance of convertible bonds, such as the new steel & vanadium to renounce the rights issue, decided the scale of issue of 1 600 million yuan of convertible bonds; some are just for the allotment or issuance of listed companies, some funds on hand, but do not want to lose the use of convertible bonds “financing misappropriating” a great opportunity, such as occurred in october 2003, convertible bonds storm merchants bank in 2002, just 10.7 billion raised funds listed investment bank, only a year later, it launched a ten billion yuan convertible bonds, financing options, and convertible debt issuance in only 6% of the outstanding shares of shareholders to subscribe to. merchants bank to fund this program was the small and medium investors, represented by the firm opposition, the final investment banks management and board of directors made some concessions, the convertible bond financing amount to 60 million in china this event caused an uproar on the capital market, seriously affecting the capital market in china merchants banks image. looking at chinas listed companies use convertible bond financing purposes, mostly not from improving the companys capital structure, reduce financing costs of departure, but in order to avoid legal regulation of capital markets and strict financing requirements, depending on the convertible bond financing for the “money tool.” second, the main issue of convertible bonds, differences in the distribution industry brennan and schwartz (1981) that, due to the convertible bond conversion terms of the content, so the value of convertible bonds in a certain sense, independent of changes in company risk - when the company engaged in high-risk investment, the value of convertible bonds, bonds declined, but the value of equity may rise, and taking into account the expansion of the company stock price volatility, the option value inherent in convertible bonds also increased; unique convertible bonds low-interest terms, making the company by reducing interest payments, reducing the the possibility of its being the financial crisis, and thus in a sense, to ease the financial difficulties the company is prone to the “inadequate investment” phenomenon, and promote the companys long-term development. convertible bonds “risk neutral” characteristics determine the main issue of convertible bonds are mainly various types of growth, high-risk companies. u.s. convertible bond issuance in various industries throughout the body, each sector in the overall share of the convertible bond market also showed a greater difference in the high volatility of the industry generally in the market as a whole account for a large proportion of .1999 in the end, the u.s. technology and telecommunications industry, accounting for convertible bonds convertible bond market, once the ratio of as much as 50%, and along with the technology and telecom shares decline of traditional industries increased the amount of convertible bonds, convertible bond market, the industry relative to a distribution of recovery state of balance. even so, the end of 2002, the u.s. tech market share of convertible bonds reached 21.1%, although down compared with 11.6% in 1999, is still the convertible bond market, the largest share of the industry, while , bio-pharmaceutical industry with its high volatility of convertible bond features also occupies a large market share. china securities regulatory commissions guiding principle is “supporting the superior” that support excellent performance, strong growth, regulate the operation of listed companies on the historical performance of the issuer are higher, and therefore has been issued or proposed to be issued from convertible bonds to the companys industrial distribution perspective, focused on electric power, textile, steel, paper, utilities and some good historical returns of the industry, and high volatility, high-risk companies were excluded from the convertible bonds issued outside the threshold due to the convertible bonds with two characteristics of debt and equity risk can be effectively transformed, in fact, these companies (high volatility, high risk) is more suitable for the issuance of convertible bonds and investment. in addition, it, biotechnology and other industries, prospects, higher risk , capital investment, it is suitable for the issuance of convertible bonds at the beginning of these companies only pay interest, will not dilute equity, diluted profits, lead to new and old shareholders of the dispute, such as the company grew up, the convertible bonds into shares , enterprises also need to repay the principal. third, the design of convertible bonds contract differences companies use convertible bond financing means that convertible bonds issued by contractual provisions designed to achieve. a typical convertible bond issuance contracts should include the issue size, type and distribution methods, the conversion price, distribution and transfer deadline share period, nominal interest rates, and several other essential elements, as well as back to the sale of provisions, redemption provisions, revised downward terms, mandatory terms, and several optional elements. convertible bonds issued by the design contract, defining clearly the issue of people with the right holder, clear the debt of convertible bonds and stock characteristics. u.s. convertible bonds essential elements of contract exist differences are as follows: (1) species differences, although the traditional interest-bearing convertible bonds convertible bonds have been issued in the united states the major varieties, accounting for the convertible bond market is about 40% of capacity particular concern is the zero-coupon convertible bonds in recent years the rapid development of zero-coupon convertible bonds in 1999 accounted for u.s. convertible bond market accounts for only 10.4%, but in 2000 the proportion rapidly increased to 22.6% in 2001 and in 2002, the proportion exceeded 30%, the issuance of convertible bonds, the united states as a major species, while the convertible bonds of chinas total interest-bearing bonds varieties in recent years, rapid development in the global market of zero-coupon convertible bonds in china difficult to achieve (2) issue, and americas overall issuance of convertible bonds, large-scale, mainly for the number of multi-family issue, the average number of small distribution. according to morgan stanleys statistics, in 2001, the united states issued a total of 210 convertible bonds, financing amounted to $ 104.5 billion, the average number of issued about $ 500 million, while chinas total convertible bond issue size large, mainly the small number of brokerage, the average number of large distribution according to the china securities regulatory commission statistics, in 2003 a total of 16 chinese companies issued 18.55 billion yuan of convertible bonds, the average distribution volume of about 1.16 billion element (3) the interest rate differential the u.s. can be quite different coupon rate convertible bonds, low of 2% or less, 10% higher to 2, of which 4% -5% of the range of the most concentrated, and our convertible interest rate bonds are lower than about 1% -2% (4) issue period the u.s. convertible bonds issuance period is the basic quality of the company according to its own established past the issue of convertible bonds, long term , mostly 10-year, even 30-year period there; convertible bonds in recent years, mainly in the period of 5 years. china <<interim measures on management of convertible bonds>> specified in the financing period is 3-5 years legislative intent does not seem to advocate the company determined in accordance with the basic quality of its release period. (5) the initial premium rate (when issued the conversion price relative to the benchmark pricing floating rate) between the united states the initial issuance of convertible bonds, premium rate changed much, there is 10% a under, 10% -20%, 20% -30%, 30% -40% are distributed in more than 40% there, although chinas convertible bond financing method for determining the initial conversion price consistent with internationally accepted that a month or a week before the issuance of stock based on the average closing price, then go up a certain percentage as the conversion price, but in order to attract investors, ensure the distribution of success of our convertible bonds are very low initial premium rate .2003 convertible bonds issued in the initial premium rates have declined, such as the younger bonds only 0.1%, marking the beginning of domestic convertible bonds before a premium rate lowest on record. links to free download contract in the design of convertible bonds, the issuers and investors on the definition of rights, mainly through the sale back to the terms, redemption terms downward correction terms, mandatory terms such as selective elements to achieve, in order to achieve the balance of benefits and risks and the incentive compatibility purposes. the rights of the issuer to raise funds, including the right to use, redemption rights, the rights of investors including claims of future earnings (bond interest and dividends after conversion) and sold back to the right. u.s. convertible bond contract contains the following provisions of the selective options: (1) when the stock price below the conversion price, the company can lower the conversion price, the downward revision clause (2) when the market surged, convertible bondholders to expand profit margins, the original damage to the interests of shareholders, with the conversion of bonds, leading to dilution, earnings per share decline. thus, the redemption provisions require, when the stock price exceeds the conversion price 130% -150%, investors must within the prescribed time limit of convertible bonds into shares, or, convertible bonds will be redeemed. this prevents future price declines, conversion failed, the company is insolvent. (3) to increase investor confidence, many companies issue shihai back convertible bonds with terms of sale when the price is not living on a low, low interest rate, convertible bonds, convertible and can not rely on profit, the investor may be convertible bonds, “also” to the company through more selective elements design, so that issuers and investors get what they want, mutual benefit, which is convertible bond financing of the charm. our convertible bond financing, although a conversion price downward revision of the design terms, redemption terms, provisions and other provisions sold back , but can not achieve the interests of both investment and financing equal protection clause of the current back to the design requirements in the sale before the expiration of six months or a year to allow investors to sell back, back to the investors may sell the conduct of the limit; although there are redemption back to the terms of the design, but companies generally will not exercise early redemption option, because its starting point is not to maximize shareholder value, but for misappropriating; the terms of the conversion price downward revision of the design is to try to ensure a successful conversion, the use of convertible bonds, equity financing to achieve the purpose of interpretation of the head from the back to the sale, redemption and conversion price downward revision to see the terms of the design intention of the initiative are in the hands of a listed company, mainly to protect the interests of the issuer, the it is not enough to protect the interests of investors. overall, our convertible bond issuers have announced a very similar distribution contract, which correspondingly increases the risk of the issuer due to the issuers industry and the industries in which the different life cycle, demand for capital different size and time, its share price movements and the oscillation amplitude is very different, if the companys convertible bonds similar contractual terms, the release phase, the same is bound to attract investors to invest, because the issuer of the contract terms are filtered different preferences of the investors filters, this will cause problems on the issue in the conversion stage, some investors are more clearly aware of their risk - return preferences after the investment may lose interest, such as conversion and the problem. it can be seen, according to the company funding the project outputs issued in conjunction with the industry life cycle status of the corresponding set of contract terms, appeal to different preferences of investors, issuance of convertible bonds is key to chinas current convertible bonds distribution system and to some extent, the relevant provisions of chinas convertible bonds, the development and improvement have a restraining effect. fourth, the convertible bond financing for the understanding of differences in risk although the issuance of convertible bonds, financing costs are lower relative to other short-term dilution of existing shareholders will not return quickly, there will be no pressure on capital expansion, but in fact, convertible bond financing is not the best way, not blindly follow suit, but also according to their actual circumstances, the issuance of convertible bonds, there are big risks, they might bring to the enterprise is enormous pressure. of th