The Motivations And Effect Of The Market-Oriented Debt-for-Equity Swap For Chinese Private Listed Companies

In 1999,in order to assist banks in dealing with non-performing assets and revitalising state-owned enterprises,the State Council established four major asset management companies,initiating the first round of debt-to-equity conversion in China,namely the "policy debt-to-equity conversion".In October 2016,in order to promote "deleveraging",the State Council issued relevant guidelines,proposing the implementation of debt-to-equity swaps by market-based means to assist highquality enterprises temporarily in debt crisis to get out of their difficulties,i.e."market-based debt-to-equity swaps".In the new round of debt-to-equity conversion,China’s large group companies have used this model to reduce their asset and liability ratios.In 2019,Premier Li Keqiang,while chairing an executive meeting of the State Council proposed to increase efforts to support private enterprises and alleviate their financing difficulties and expensive financing problems.Private enterprises play a vital role in China’s economic development.Therefore,it is urgent to solve the financing problem of private enterprises.In this context,this paper combines relevant theories,collects the current situation of debt restructuring and implementation of market-based debt-to-equity conversion of listed companies in China,selects Yuanxing Energy,a private listed company that has successfully completed market-based debt-to-equity conversion,as a case study,explores in depth the internal and external motivations of its implementation of debt-to-equity conversion,composes the whole process of the programme,evaluates the features and shortcomings of the programme,assesses its market effect and its impact on financial performance and non-financial performance The paper draws conclusions and makes recommendations with a view to providing some reference for listed enterprises,especially private enterprises,in financial difficulties.Specifically,this paper first collects information on debt restructuring of listed companies in China over the ten-year period from 2013 to 2022,and the data shows that the manufacturing industry is a frequent sector for debt restructuring.As the market-based debt-to-equity conversion began in September 2016,all listed companies implementing market-based debt-to-equity conversion from 2017-2022 were also selected as a sample,and it was eventually found that 2019 ushered in a debt-to-equity conversion boom.The market-based debt-to-equity conversion project of Yuanxing Energy in 2018 was then used as a case study to analyse the internal and external motivations for its implementation,mainly for five reasons:policy support,industry downturn,low gearing ratio,declining production and sales volume and weak profitability,to elaborate on the implementation path of the programme,and to summarise the features and shortcomings of the programme.The features of the proposal are that it takes into account the interests of all stakeholders and provides multiple exit options,while the shortcomings are that no social capital is introduced,the betting agreement is unreasonable and there is a suspicion of explicit equity but real debt.From the short-term market reaction,it is concluded that the impact of this market-based debt-to-equity transfer on Yuanxing Energy’s share price in the secondary market is relatively small.The analysis of the four financial indicators shows that the market-based debt-to-equity swap has had a significant positive impact on the financial performance of the company.It has effectively reduced the asset-liability ratio of the enterprise,repaid the debts that were about to mature,alleviated the debt crisis,enhanced the short-term and longterm debt servicing capacity,and improved the operating capacity,profitability and future development capability to a certain extent.The non-financial impact of the debt-to-equity swap was studied in three aspects: promoting the strategic transformation of the enterprise,improving operating performance and promoting the fulfilment of corporate social responsibility.Suggestions are made at the enterprise level,at the level of the implementing agency and at the level of the government to address the shortcomings of the scheme and in the light of relevant research.Finally,we reflect on the shortcomings of this paper and propose directions for future research.