| It is well known that 2017 is a crucial year as it marks the beginning of some of the boldest reforms on the refinancing regulatory legislatures with regards to firms in the financial market.The Chinese Securities Regulatory Commission made efforts to implement significant changes to current policies regarding the refinancing tools in the market in order to incentivize firms to choose convertible bonds as their refinancing option.As a result,the number of firms as well as the total value of the convertible bonds issued by companies skyrocketed in the year 2017 as a result of the policy change.As of February 2020,the collective amount of convertible bonds issued in the country reached a record number of 3763.63 billion Yuan.Tongwei is a multi-national corporation specialized in manufacturing animal feeds in the agricultural sector and solar panel in the renewal energy sector,making it an excellent sample to study major corporation with large-value convertible bonds issued in recent years.Its decision to issue 5 billion Yuan worth of convertible bonds has provided great sources of materials for the research of convertible bonds by setting an example for a case study.The case provides researchers an opportunity for an analysis on the incentives behind its decision of issuing convertible bonds as its primary refinancing option,to its methods of clauses-setting embedded in the contract,and finally provides an opportunity to study the question whether the issuing price of the convertible bonds deviates from its actual value.This paper combines both qualitive and quantitative analysis.The first part is mainly based on theoretical analysis,combining studies both abroad and domestic regarding convertible bonds.In the first part,we examine the motives behind issuing convertible bonds for refinancing by analyzing its comparative advantages to issuing pure bonds or stocks.This paper finds that the cost benefit as well as an increase in a more balanced capital structure are among the most important advantages as a result.Not only the costs of issuing stocks or bonds are significantly higher but also a higher level of debt would result in a debt-to-stock ratio which would in turn lead to an increasingly higher level of interest rate when it comes to borrowing.In the second part of the theoretical study,we analyze different designs of call and put clauses embedded in the convertible bonds,and how the clauses would affect the efficiency of conversion from bond to stocks from investors’ points of view and how they affect the firm’s decision of calling the bonds.Lastly,this paper provides an example to determine whether the issuing price set for the convertible bonds by the company deviates from its fair value.This is to determine the efficiency of price-setting from the issuing company.To do this,we analyze different factors that influence the fair value of convertible bonds and examine the method of employing B-S model to calculate the value of the option part of the convertible bond after which it is then added by the value of the bond in order to determine the fair value of the convertible bond.This paper chooses Tongue corporation as its case study.The contents of this case study are broken into the following parts: first,whether its fiscal condition(including its solvency,capital structure,PM and assets management level relative to other companies in the same industry)justifies and motivate its decision to issue convertible bonds.Secondly,we use Black-Scholes as a model for evaluating the fair potion value of the convertible bond issued by Tongwei by using parts analysis while adjusting the model by taking into consideration the effects of the call and put clauses embedded in the convertible bonds.Then we compare the issuing price of the bond with its fair value calculated using our model to determine whether there is a discrepancy.From the research established as described above,we are able to find results as followed:(1)From our calculation of its fiscal condition by estimating its solvency,asset management ability,profit margin level relative to similar companies,we found it has a high profit margin and is fiscally solvent,while the firm shows its decreased ability to maintain a balanced capital structure from relying too much on financing through debt which results in a unhealthy capital structure that stands to be corrected by modifying its refinancing methods.(2)By choosing to issue convertible bonds as its refinancing method,the firm is able to maintain a relative low debt-to-stock ratio by abandoning its usual heavy reliance on the short-term bonds.This proves to be helping the firm to lower its cost of refinancing and decrease its likelihood of insolvency while maintaining a balanced capital structure.(3)The pricing of the initial offering of the convertible bond is highly ineffective according to this study.Based on the estimated historical volatility of the company’s stock,the value of the option is calculated.Using Black-Scholes model,the fair value of the convertible bonds is broken into two parts that include the value of the bond and the value of the option which is then further corrected considering the call and put clauses embedded in the convertible bond.By combining the pure bond value and the corrected value of the option,the fair value is determined and found to be larger than its issuing price.Therefore,the large discrepancy between the two values testifies an ineffective pricing method.This mirrors that problem that has long plagued the companies nationwide which is that companies usually undersell the convertible bonds due to adverse selection as a result of asymmetric information in the current market.In the end,this paper hopes to provide some insights to choosing the proper refinancing method for companies by presenting the case study of Tongwei Corporation.It is essential to take into consideration its unique fiscal properties when considering its options.It is also hoped that companies could be more creative when designing the clauses embedded in the agreements to minimize its cost while maximize the likelihood of the bond’s conversion to stocks. |
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