Case Study Of Market-Oriented Debt-to-Equity Swap In Aluminum Corporation Of China Limited

The new normal economy indicates that China's economic development has entered a new stage in China,the rate of economic growth has declined,and the economic structure has been continuously optimized.Some state-owned enterprises in China,especially the coal,steel and non-ferrous metal industries,are mostly facing overcapacity and high asset-liability ratios.In addition,the non-performing loans and non-performing loan ratios of commercial banks have been increasing in recent years.It increased the bank's operating costs and system risks,and reduced the bank's profitability.Therefore,in October 2016,the State Council issued the "Guiding Opinions on Debt-to-Equity Conversion of Market-oriented Banks"(hereinafter referred to as the "Guiding Opinions"),which marked the official opening of a new round of debt-to-equity swaps in China.Subsequently,relevant government departments and banks in China have issued a series of supporting policies to ensure the orderly implementation of market-oriented debt-to-equity swaps.Market-oriented debt-to-equity swaps help companies to reduce capacity and deleverage,and promote China's supply-side structural reforms.Since the introduction of the market-oriented debt-to-equity policy,according to People's Bank of China report,as of the end of 2019,the market-oriented debt-to-equity investment has exceeded 1.4 trillion yuan.It is expected that more companies will implement debt-to-equity swaps in 2020.This policy has become One of the best choices for companies to reduce capacity and deleverage.The implementation of market-oriented debt-to-equity swaps will help enterprises reduce their asset-liability ratio,optimize their capital structure and internal governance structure,promote industrial transformation and upgrading,and enhance their overall competitiveness and sustainable profitability.This round of market-oriented debt-to-equity swaps is different from the previous round of policy-based debt-to-equity swaps.It is based on the principle of marketization and rule of law.The government's role has changed from leading to guiding and supervising the implementation of debt-to-equity swaps.According to the relevant policies of this round of debt-to-equity swaps,compared with the previous round of debt-to-equity swaps,the scope of the conversion is more extensive.Private enterprises can also be used as target companies to implement market-oriented debt-to-equity swaps;implementing agencies have increased insurance asset management agencies,state-owned capital investment and operation companies,andbank affiliates;sources of funds are also more abundant,allowing social capital such as trust funds and private equity funds to participate in debt-to-equity swaps;exit channels have become more diversified.In addition to repurchase,transfer of equity,and listing,methods such as mergers and acquisitions,restructuring,and negotiation have been added.Enterprises and investors have more autonomy in the implementation of market-oriented debt-to-equity swaps,and can more effectively design the debt-to-equity swap process to ensure the successful implementation of debt-to-equity swaps based on the characteristics of different industries and the actual situation of the target enterprises.The case company selected in this article is Aluminum Corporation of China Limited(hereinafter referred to as "China Aluminum"),which is currently a leading company in the domestic non-ferrous metal industry.It has good future development prospects,but the company's asset-liability ratio is high,and the overcapacity is serious.Therefore,in September 2017,China Aluminum implemented a market-oriented debt-to-equity swap to optimize the company's capital structure and improve the asset quality of listed companies.As China Aluminum is a large state-owned enterprise and its scale of debt-to-equity swaps is in the tens of billions.Research on its market-oriented debt-to-equity swaps is helpful for summing up successful experiences and lessons for other state-owned enterprises,and it has very important reference value.This paper first collects,collates,evaluates and summarizes domestic and foreign literature on market-oriented debt-to-equity swaps;second,I summarized and analyzed the concept,characteristics,models,implementation drivers,and risks of market-oriented debt-to-equity swaps,sorted out the theoretical basis of market-oriented debt-to-equity swaps,and built the basic logical structure of this article;next,I introduced the implementation of China Aluminum's market-oriented debt-to-equity case,which mainly includes the company profile,the motivations for the implementation of the market-oriented debt-to-equity conversion,and the implementation process.The four steps of the implementation process are identifying the target company,identifying the strategic investor,introduce strategic investors to increase capital and expand stocks,and purchase equity of subsidiaries through issue of shares to realize equity exit.Finally,the case of China Aluminum's implementation of market-oriented debt-to-equity swaps was analyzed,including economic effects,reasons for implementation,and lessons learned.The economic effects of market-oriented debt-to-equity swaps include reducingcorporate debt costs,promoting corporate transformation and upgrading,optimizing internal governance structures,and increasing corporate market competitiveness.The reasons for realization include adherence to the principles of marketization and rule of law in the process of debt-to-equity swaps,reasonable selection of qualified enterprises and implementing agencies,implementation of a market-oriented debt-to-equity process,selection of an equity exit mechanism that meets their own circumstances,and efforts to protect corporate shareholders Rights.Lessons include weakening the role of interest tax deductions,failing to fundamentally address capital structure issues,and failing to cure internal governance structures.Through case analysis,China Aluminum has reduced the total corporate debt by12.6 billion yuan through the implementation of debt-to-equity swaps,which has positive significance for companies to reduce leverage,optimize capital structure and improve company asset quality.Finally,the research conclusions are as follows: First,market-oriented debt-to-equity swaps are good for companies to cut capacity and deleverage;second,companies should carefully choose market-oriented debt-to-equity swaps;Third,companies should formulate reasonable market-oriented debt-to-equity swap process.Based on these conclusions,several suggestions were made for other Chinese companies to implement market-oriented debt-to-equity swaps: first,optimize corporate choices and truly serve supply-side reforms;second,further improve the equity withdrawal mechanism;and third,improve the market-based debt-to-equity supporting mechanism;the fourth is to strengthen the supervision of market-oriented debt-to-equity swaps.