Study On The Effectiveness Of Market-oriented Debt-to-Equity Swaps In Nonferrous Metal Industry

In recent years,the high non-performing asset ratio of commercial Banks and the high leverage ratio of non-financial enterprises restrict the healthy and orderly development of enterprises and Banks,although China’s economy has shifted from the stage of rapid growth to the stage of high-quality development.In the 1990 s,the government implemented a debt-for-equity swap policy,which successfully reduced the non-performing asset ratio of Banks and improved the financial condition of state-owned enterprises.The state council issued the guiding opinions on debt-to-equity swaps of market-oriented Banks in 2016(hereinafter referred to as the guiding opinions),which opened a new round of debt-to-equity swaps.The new round of debt-to-equity swap emphasizes following the principle of legalization and proceeding in a market-oriented way,and is committed to gradually easing the burden of enterprises and further improving the corporate governance structure,so as continuously promote the transformation and upgrading of China’s industrial economy.Existing researches on market-oriented debt-to-equity swaps mainly focus on the differences between two rounds of debt-to-equity swaps,the mechanism of market-oriented debt-to-equity swaps,and the risks of market-oriented debt-to-equity swaps,and most of them are based on the macro perspective,legal perspective or commercial bank perspective.From the perspective of micro enterprises,this paper conducts an in-depth study on the effectiveness of market debt-equity swap in optimizing governance structure,improving financial status and reducing financial risks by combining specific cases.On the one hand,this paper can develop and enrich the theory and experience of carrying out debt-to-equity swaps by means of marketization in China;on the other hand,this paper can provide effective reference for the subsequent enterprises carrying out market-oriented debt-to-equity swaps,so that they can avoid possible risks and ensure the order of the capital market.The case enterprise selected in this paper,aluminum corporation of China LTD.(hereinafter referred to as CHALCO),is the first case of state-owned enterprises in the nonferrous metals industry carrying out market-oriented debt-to-equity swap under the background of supply-side reform.CHALCO is the leading enterprise of domesticnonferrous metal industry,it always plays a strategic role.Since 2010,its debts has been growing,the asset-liability ratio peaked at nearly 80%,and brings the huge financial crisis risk to the enterprise.In order to get out of difficulties and further transform and develop,CHALCO started the process of market-oriented debt-to-equity swap in 2017.This paper introduces in detail the motivation and steps of the debt-equity swap of CHALCO,and especially evaluates the effectiveness of the market-oriented debt-equity swap in detail.In this paper,case study,literature study,comparative study and event study are adopted to evaluate and analyze the effectiveness of market-oriented debt-to-equity swap plan of CHALCO from five aspects: governance structure,debt paying ability,profitability,financial risk and capital market reaction.The analysis found that: the debt-for-equity swap improved the ownership structure of CHALCO to some extent and standardized the behavior of major shareholders.It has effectively solved the situation that the enterprise debt is too high,and the enterprise long-term debt repayment index has improved obviously.At the same time,the financial leverage decreased significantly,so that the financial risk in the short term of the enterprise reduced.However,the improvement of corporate short-term solvency and profitability that made by market-oriented debt-to-equity swap plan is weak;After the implementation of the debt-to-equity swap,the cumulative abnormal return of CHALCO H shares fell in a straight line,resulting in a market loss of nearly 40%.This shows that the market-oriented debt-to-equity swap has not been recognized by the capital market,and the debt-to-equity swap scheme still has limitations.In a short period of time,the results show that the market debt-for-equity swap can reduce the debt ratio of enterprises,help enterprises out of difficulties,optimize the financial leverage and reduce the financial risks of enterprises.In the long run,the market-oriented debt-for-equity swap can improve the corporate governance structure,provide opportunities for the transformation and development of enterprises,and promote the transformation of enterprises to high-quality development.However,there are also defects.The market-oriented debt-for-equity swap has not been recognized by the capital market and has not achieved the expected positive goal of enterprises.Therefore,the effective implementation of market-oriented debt-equity swaps should be based on the premise of scientific implementation mechanism,and the effectiveness of market-orienteddebt-equity swaps should be viewed rationally.At the end of the paper,four suggestions are put forward based on the effective experience and shortcomings of the market-oriented debt-equity swap plan of aluminum corporation of China,hoping to bring some enlightenment and reference to the implementation of the market-oriented debt-equity swap plan of non-ferrous metal enterprises and other industries.