Is debt-to-equity swap good or bad news?
A debt-to-equity swap refers to the state setting up a financial asset management company to acquire banks' non-performing assets and convert the original creditor-debtor relationship between the bank and the enterprise into an equity-property rights relationship between the financial asset management company and the enterprise. After debt is converted into equity, the original repayment of principal and interest is transformed into dividends paid according to shares. Now let us take a look together at whether a debt-to-equity swap is good or bad news!
Is a debt-to-equity swap good or bad news?
There is no absolute conclusion on whether a debt-to-equity swap is good or bad news, but in the short term it is bad news, because the condition for a debt-to-equity swap is that converting into stock is more profitable. Converting bonds into ordinary shares of the company increases the number of shares in circulation. If there were originally 10 million shares and now 10 million more shares are converted, it becomes 20 million shares. When there were originally 10 million shares, the stock price bought was 5 yuan; now that there are 20 million shares, is the stock price still worth 5 yuan? Therefore, the stock prices of most companies with convertible bonds cannot go up. In the long term, it depends on the quantity and the company's fundamentals.
What characteristics does a debt-to-equity swap have?
1. Debt nature: Convertible bonds, like other bonds, also have stipulated interest rates and terms, and investors can choose to hold the bonds until maturity and collect principal and interest.
2. Equity nature: Before being converted into stock, convertible bonds are purely bonds, but after conversion into stock, the original bondholders change from creditors into shareholders of the company and can participate in the enterprise's business decisions and dividend distribution.
3. Convertibility: Convertibility is an important marker of convertible bonds, and bondholders can convert the bonds into stock according to agreed conditions. The conversion right is a choice enjoyed by investors that ordinary bonds do not have.
What is the impact of a debt-to-equity swap on stock prices?
1. For investors, a debt-to-equity swap has both debt characteristics and equity characteristics, and is a choice for investors to avoid risk. Usually the coupon rate of the bond is relatively low. When the stock price rises, investors obtain a double gain. Early redemption is a method used by the issuer to suppress investor returns. For debt-to-equity swaps abroad, early redemption generally has a 20% premium, while in our country it is generally 30%. With early redemption, investors all choose the debt-to-equity swap method; no investor will want cash and give up the 30% premium return.
2. When a company triggers early redemption of a debt-to-equity swap, generally speaking the company's development is relatively ideal, which is reflected in the stock price. In addition, early redemption of a debt-to-equity swap will not use the company's funds; it merely increases the number of shares and reduces financial expenses, which is more positive than a simple additional share issuance, and for the company there is no pressure to pay interest.
3. It is relatively easy to raise funds, and the scope of fund use is relatively loose, laying the foundation for the company to carry out mergers, acquisitions and restructuring.
4. There is no worry that the debt-to-equity swap portion will be sold off to push down the stock price. The targets of debt-to-equity swaps are generally strategic investors, and small retail investors are not eligible. These people should have a good understanding of the company's operations and will not easily sell off stocks that they believe have huge room for growth.