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The exchangeable bond is a kind of corporate bond issued by an issuer with its shares in a listed company as collateral and exchanging target. A bondholder can exchange bonds held by it into shares in the listed company within a certain term according to stipulated conditions.
The release of the “Detailed Rules” by the SSE and the previous announcement on issuance intention of Baosteel Group symbolize that public issuance of exchangeable bonds is to be launched soon.
Lately, the Shanghai Stock Exchange (SSE) has released the “Detailed Rules of Implementing Business of Exchangeable Corporate Bonds” (the “Detailed Rules” for short), which specifies listing and trading, information disclosure, and exchanging bonds into shares on the SSE for the exchangeable bonds publically issued by listed companies’ shareholders. A new channel has been provided for shareholders to vitalize their shares in listed companies.
Public issuance of exchangeable bonds to be launched soon
According to the notice released by New China Life Insurance (NCI) in April, NCI’s shareholder Baosteel Group plans to take some of its A shares in NCI as the target and publically issue exchangeable corporate bonds. The release of the “Detailed Rules” by the SSE and the previous announcement on issuance intention of Baosteel Group symbolize that public issuance of exchangeable bonds is to be launched soon.
According to the “Trial Rules of Issuing Exchangeable Corporate Bonds by Shareholders of Listed Companies” of the China Securities Regulatory Commission, exchangeable bond is a kind of corporate bond issued by an issuer with its shares in a listed company as collateral and exchanging target. A bondholder can exchange bonds held by it into shares in the listed company within a certain term according to stipulated conditions.
Exchangeable bonds and convertible corporate bonds have some similarities. On the one hand, they have similar bond elements, such as coupon rate, maturity, and share-swap price and period; on the other hand, like convertible bonds, investing value of exchangeable bonds is related to the performance of relevant listed company and exchangeable bonds can be swapped into target shares at an agreed price.
Their differences are as follows: first, issuing bodies are different. The former is shareholders of listed companies, and the latter is listed companies; second, sources of swapped shares differ from each other. The former is shares in other companies held by an issuer, and the latter is the new shares to be issued in the future by an issuer; third, their influences on the total issued shares of a target company are different, as swap of convertible bonds into shares will enlarge the total issued shares of the issuer and dilute the earnings per share, while swap of exchangeable bonds into shares will not.
Little influence on price of target shares
The SSE has made following arrangements in terms of the listing and trading of exchangeable bonds to actively promote the development of exchangeable bond products. First, net price trading is adopted for exchangeable bonds; second, more space is left for the collateralized repo and financing of the exchangeable bonds that meet relevant repo standards; third, investors’ bond trading and share-swap right are not directly restricted unless the bonds trading should be suspended or the swap of bonds into shares should be temporarily suspended when trading of the shares for exchange is suspended or defects of the right appear and affect the share swap; fourth, convertible bonds have the minimum circulation value of RMB30 million, but the “Detailed Rules” does not limit the minimum circulation value for exchangeable bonds, presenting a more flexible product design.
At the same time, the “Detailed Rules” intensifies the requirements of disclosing special risks of exchangeable bonds to strengthen risk prevention. The first is to require the issuer to designate a special liaison for information disclosure; the second is to add in the regular information disclosure all previous adjustments or revisions of share-swap prices and the accumulative share swap circumstances after the bonds issuance; the third is to require the issuer to timely conduct provisional information disclosure when adjusting or revising share-swap prices or when the shares for exchange receive a risk alert or their listing is suspended and terminated; the fourth is to clarify relevant responsibilities of the trustees. Besides, the issuer is required to timely supplement the shares when the number of exchangeable shares is insufficient due to the adjustment or revision of share-swap prices according to the provisions of the prospectus.
Market participants said that listed companies’ shareholders can get a long-term solution to vitalizing their equity asset and further enhance asset utilization efficiency by issuing exchangeable bonds. According to the analysis of market participants, the pilot of the exchangeable bonds business will have little influence on the prices of the secondary stock market. First, as shares for exchange are floating shares without sales limit when exchangeable bonds are issued, they will not increase the supply of target shares. Second, as share-swap price of exchangeable bonds has a relatively higher premium than relevant benchmark price, share-swap at high price will have little influence on the secondary market. Finally, exchangeable bonds can be exchanged into shares 12 months after its issuance, which will effectively relieve the direct impact on the stock trading price. A bondholder has the final decision on whether to exchange into shares, and investors will only choose to exchange into shares when they have a good expectation toward their held shares.
