Research On The Causes And Risks Of Market-oriented Enterprise Debt-to-equity Transfer

After the financial crisis,China's economic growth slowed down and a new economic normal emerged.Traditional real sectors suffered from high overcapacity,poor performance,high indebtedness and high debt leverage,with the leverage ratio of non-financial enterprises reaching 166.3% in 2016,up about 70% from 2008.Due to the large ratio of corporate debt financing and,As a result of the weak solvency,commercial banks' defaulted assets increased year-on-year and the proportion of defaulted loans rose rapidly,and the urgent need to restructure and modernise businesses to enhance risk protection and preserve banking capacity and financial sector stability.Therefore,in order to promote sustainable economic development,the country proposes the following a supply-side reform strategy through debt and equity swaps that would main way to help enterprises reduce leverage and deepen their mixed reform.Under the principle of market operation and policy guidance,this round of debt-to-equity transfer is negotiated by the relevant parties independently,and the transfer agreement is made on a "one-enterprise,onestrategy" basis,with the price and funds raised in strict compliance with marketbased principles,and the market-based equity exit is finally realized.The current market-based debt-to-equity conversion is dedicated to the following objectives helping enterprises deleverage and banks deal with non-performing credit assets,which,on the one hand,alleviates the pressure on enterprises' financial leverage and optimizing the business environment,on the other hand,help commercial banks to reduce the share of non-performing loans and support the transformation and modernization of banks,business model diversification and mixed business development.Against this background,domestic and international researchers have begun to study the current round of debt-to-equity swaps,but most take enterprises as their starting point,examining the problems and risks they face when implementing debtto-equity swaps,as well as the changes in enterprise performance before and after the swaps,and fewer studies take commercial banks as the entry point,but commercial banks,as the leading players in this round of debt-to-equity swap,have certain research value in terms of their implementation motivation and management experience.However,commercial banks are the main players in this round of debtfor-equity swaps,have certain research value in terms of their implementation motivation and management experience,which can be a source of experience for other commercial banks.This paper therefore looks at the following aspects from the perspective of commercial banks.CCB's market-based incentives for debt-toequity conversion,the strategy adopted to select the conversion,the objectives and potential risks of debt-to-equity conversion,and the SEC's experience in risk management,taking into account Yunxi's debt-to-equity conversion plan.Finally,we offer management's suggestions on the current risks for commercial banks in converting debt into equity.CCB is an active leader in this round of market-based debt-to-equity conversions,following the policy guidance and setting up a special project team to proactively explore debt-to-equity conversion business.In addition to responding to the country's call to help high-quality enterprises in temporary distress to deleverage and improve their business conditions,CCB launched the debt-to-equity conversion project more from the perspective of profitability,wanting to help banks transform and upgrade,develop new profit models and increase investment income.The main risks that commercial banks currently face in implementing debt-to-equity swaps are: the risk of identifying the purpose of the conversion,the bank's capital safety risk,the corporate governance risk and the capital outflow risk.On this basis,CCB prefers leading enterprises with competitive products,which are only in temporary distress and can quickly get out of trouble and improve their operation through deleveraging,in the selection of enterprises for conversion.In terms of risk response,in order to protect the safety of capital,CCB adopted the "fund" isolation model,creating funds to leverage equity,thus reducing capital investment,but also through the implementation of institutions to achieve a legally mandated level of riskblocking in order to achieve high returns.cross-shareholding locking quality equity,CCB acquired equity from the tin industry shares,the leading enterprises in the tin industry,profitability is guaranteed leading enterprise in the tin industry,with guaranteed profits;for this reason,a number of special provisions have been included in the transfer agreement to ensure a smooth termination of the capital relationship.agreeing on profit sharing,performance requirements and corporate buyback.The novelty of this paper is the analysis of debt conversion and its motivation from the bank's perspective,the analysis of debt conversion implementation and the risks that may arise during implementation from CWB's perspective,and a summary of CWB's experience in risk management.CCB's management team is actively reviewing market-based debt-to-equity conversions as they occur and has experience is valuable and can provide a direction of reflection for subsequent debtto-equity conversion projects,help commercial banks transform and modernise their business by swapping debt for equity,optimizing their capital structure,improving profitability and maintaining financial stability.