A Case Analysis Of Exchangeable Bonds Issued By Benxi Iron & Steel(Group) Co.,Ltd

Exchangeable Bonds(EB)are corporate bonds issued by the shareholders of a listed company for the shares they hold to the custodian.The bondholders can exchange the bonds into listed companies stock within a certain period of time.Exchangeable bonds is a variant of convertible bonds(CB),they are very similar in terms of investment characteristics.The main difference is that the issuer of EB is the shareholders of listed companies,while the issuer of CB is listed company itself.Like CB,EB usually have the characteristics of dual options: on the one hand,investors can choose whether to convert their shares or not,and bear the lower interest rates for the bonds;On the other hand,an EB issuer may have the option to exercise a redemption by setting a redemption clause,but at a higher interest rate than a CB without a redemption clause.Dual option is the most important financial feature of such bonds.According to the distribution of the main issuer,the exchangeable bonds can be divided into public EB and private EB,both of which have significant differences in terms of issuance threshold,regulatory requirements and liquidity.Compared with the public EB,the terms of private debt are designed to be more diversified and more flexibleIn 2016,Benxi Iron & Steel(Group)Co.,Ltd issued a total of 4 billion yuan of 4 private EB with the same duration of 3 years and the same exchange period of 6 months.The interest rates followed by 4%,3%,2% and 1%,respectively,to refresh the lowest bond interest rates in Northeast China and the domestic steel industry.This paper analyzes the case of Benxi Iron & Steel Co.,Ltd.’s issuance of exchangeable bonds,and concludes that because of the exchangeable bonds have compensation interest rates and option values,and the market demand continues to rise,the coupon rate of exchangeable bonds is falling.Moreover,due to the threshold of qualified investors and the lack of market price reference,there is a lack of liquidity in private exchangeable bonds.At the same time,through the Monte Carlo simulation,and according to the actual situation of China’s private exchangeable bond market,the option discount factor and liquidity discount factor were introduced,and the four private exchangeable bonds issued by Benxi Iron and Steel were priced as reasonable pricing results.From the above conclusions,the paper proposes that issuers of exchangeable bonds can design lower reasonable coupon rate at the time of issuance to reduce the cost of financing.At the same time,when assessing the investment value of private exchangeable bonds,investors are advised to consider the discount factors of exchangeable bond options and the liquidity discount factor of privately-traded bonds to make more reasonable investment decisions.