Research On The Economic Consequences Of Perpetual Debt Financing

Since the Wuhan Metro Group issued the first renewab le corporate bonds in China in November 2013,the perpetual debt has developed rapidly in China.This is due to the fact that perpetual bonds,as an emerging hybrid capital instrument in the capital market,have advantages that are not available in bond financing and equity financing,such as deferred interest payment terms and renewal options,which make the issuing companies reduce while obtaining long-term funds.Asset-liability ratio,therefore,perpetual debt financing is favored by high-debt enterprises such as real estate and infrastructure.Perpetual debt financing is a double-edged sword.Although it has advantages that other financing methods do not have,there are still risks in the enterprise through perpetual debt financing.First,although most of the domestic perpetual bonds are subject to deferred interest payment terms,the issuer has the right to choose to defer the current interest to the next payment on the first maturity date of the perpetual bond,and is not subject to deferral.The limit of the number of times,but since the interest of deferred payment is calculated according to the current coupon rate and then accumulated to the next period,this will make the company that chooses the deferred payment bear heavy financial expenses;Secondly,the interest rate jump clause will greatly increase the renewal cost of the issuer,so that most enterprises exercise the redemption right at the interest rate reset point,and the nominal perpetual bond becomes the actual term bond;The issuing companies all include perpetual bonds in equity.Although they reduce the financial leverage and form their capital structure in form,the perpetual debt does not reduce the financial burden of the issuer.The company still has potential financial risks.In this context,the author chose China Railway Construction Co.,Ltd.as an example to analyze the effects of the company’s use of perpetual bonds to finance.The first part is the introduction.Firstly,it introduces the research background and significance,and then combs the relevant domestic and foreign literatures.Finally,it briefly describes the research framework of this paper.The second part mainly analyzes the relevant financing theories,the related concepts and terms of perpetual debt financing,and briefly reviews the current status of domestic perpetual bonds.The third part gives a brief introduction to China Railway Construction’s shareholding structure and main business,and then takes "16 Tiejian Y1" as an example to carry out relevant terms and motivation analysis.The fourth part is the case study of China Railway Construction.This part is divided into four sections,namely the actual financial effects,comparative advantages,announcement effects and potential risks of perpetual debt financing.The fifth part is based on the previous analysis and draws corresponding conclusions.Through research,this paper draws the following conclusions:First,China Railway Construction’s perpetual debt financing has significantly enhanced its solvency and growth capacity;Second,China Railway Construction’s financing through the issuance of perpetual bonds is relatively low in cost,financial leverage is small and its capital structure has been optimized to a certain extent;Third,China Railway Construction’s perpetual debt financing has produced a negative announcement effect,which may be because perpetual debt financing is risky to investors;Fourth,the risks brought about by perpetual debt financing cannot be ignored.For example,potential financial risks,reduced use efficiency of funds,and perpetual bond interest may erode shareholders’ profits.