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Research on Call Provision of Convertible Bond

Author: YangFan
Tutor: TanLiRong
School: Southwestern University of Finance and Economics
Course: Economic Law
Keywords: Convertible bonds Redemption right Call Policy Redemption protection Tip of redemption
CLC: D922.287
Type: Master's thesis
Year: 2008
Downloads: 146
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Abstract

After separate, world financial mixed operation, the liberalization of commission, to relax control the evolution of the four stages of development, into today financial liberalization era. During this period, a huge number of funds in pursuit of profit opportunities worldwide, hope to get the maximum benefits with minimal risk, financial capital for low-risk, high-yield investment vehicle demand, a direct result of the rapid development of innovative financial instruments . In an endless variety of financial innovations, the emergence of the convertible bonds, the first time across the yawning gap between debt financing and equity financing to provide a new means of financing to fund the demand side, but also for the capital The supply side of the low investment risk, high expected return ideal investment products. Therefore, convertible bonds generated in the United States since 1843, it quickly became an important part of the bond market. In the 1980s, the annual report of the Bank for International Settlements official from the International Classification of bonds - European bonds and foreign bonds, re-divided into fixed-rate bonds, floating rate bonds and asset contact bonds (Equity-Related Bond) logo with convertible bonds in the world's stock market to establish the status. With right of redemption of convertible bonds in the 1950s, its main purpose is: to avoid the reduction in interest rates brought about by the loss of interest rate differentials, speed up the conversion process, to avoid the risk of conversion is blocked and avoid financial risks. Right of redemption of the rights and obligations of issuers and investors has a certain symmetry, has since been used in the vast majority of convertible bonds, but because of the right of redemption to the end of mandatory credit and debt, income investors restrictive as well as the tendency to protect the interests of the issuer, with only a right of redemption of convertible bonds by the general reluctance of investors, had a negative impact on the convertible bond issue of corporate financing. In 1975, Toshiba Corporation of Japan issued the world's first with only back option of convertible bonds, the issue market risk has issuer commitments, design single back option of the issuer, in particular, long-term issuance of convertible bonds is too negative, so rarely used. : 1987-1992 134 convertible bonds issued by the New York Stock Exchange and the American Stock Exchange, only four cases have putable. In 1985, Merrill Lynch invention can redeem the bonds can be sold back-LYON (Liquid Yield Option Note). Due to the design of the system of checks and balances between the redemption right back option, the bonds between the rights and obligations of the issuer and the investor to obtain a new balance Lyon a once produced, they were enthusiastic pursuit of market , also officially laid the basic mode of modern convertible bonds. Since then, the right of redemption of convertible bonds value and distribution companies, shareholders, investors, academics and practitioners agree that the rights and obligations between the design of the convertible bonds, the redemption rights as one of the factors that must be considered important interests. Convertible bonds redemption right is the power under certain conditions, the issuing company to buy back outstanding convertible bonds to investors at a price agreed in advance. The level of protection of the interests of investors in accordance with the right of redemption, redemption rights can be divided into absolute security type (absolute protection), the completely insecure type (no protection), soft security type (soft call protection), hard to protect the type of (hard call protection) are four: absolute protection redemption right, is the issuer has the right during the convertible bonds have a redemption request, the investment in the conversion period of the freedom to choose the timing of the conversion, the greatest value to investors all market risk have the issue of the Company and its shareholders bear; completely protect the type of redemption right, the issuance of corporate bonds during the existence of any point redemption request, no redemption period of protection and redemption conditions most favorable to the issuing company and its shareholders, market risk can be completely transferred to the investors, the investment at any time by the threat of reinvestment and redemption risk; soft protection redemption option, the underlying stock convertible bonds prices, specific conditions are met within a specific period of time, the issuing company can redemption request, in accordance with the prior agreement of the price to buy back not yet convertible bonds. It should be noted that, even if they meet the conditions of redemption, the issuing company can also free to choose whether or not to exercise the right of redemption, and when the exercise of the right of redemption. In addition, soft to protect the type of redemption rights usually have agreed period of redemption prompt, in order to protect the interests of the investors; hard to protect the type of call option is the convention of redemption, redemption protection during the redemption period of protection , the issuing company for any reason redemption request, such as: the market interest rate, convert the underlying stock rises too large. The longer the duration of the redemption period of protection, the greater the probability of convertible bonds underlying stock prices, investors have a higher value. Redemption rights may include one or more of the following constituent elements, design portfolio and in accordance with the the issuer needs and market conditions: 1, the irredeemable period, also known as the redemption period of protection. Is from the issue date of the bonds can not be redeemed for a period, usually 1-3 years. Individual bonds with special redemption right, is in non-redeemable during the period, if the stock price reaches a certain price high to allow the issuing company redemption rights. 2, the redemption period. Not be the end of the redemption period, enter the redemption of convertible bonds divided into redemption of two is not limited to the time of redemption and the limited time. Is not limited to the time of redemption generally only can be implemented in accordance with the agreement provides for the redemption of time and the redemption price; limited time to redeem the general provisions redemption price for the previous limited time redemption price plus interest payable until the reference time now . Can also be divided into regular redemption and irregular redemption, regular redemption refers to the company to buy back at a pre-agreed time and price for the conversion of the convertible bonds; irregular redemption according to the underlying stock price movements a pre-agreed price to buy back outstanding convertible bonds. 3, redeemed Price. The determination of the redemption price is the equilibrium outcome of the shareholders of the Company and the interests of investors. 4, the redemption conditions. The redemption conditions is the core constituent elements of the right of redemption, can be divided into two situations: First, unconditional redemption. This redemption conditions can occur only during the redemption period, the Issuer in accordance with the agreed price, redemption of bonds. Second, conditional redemption, is to set the upper limit of the stock price, that is, when the stock price rose to a certain extent the Issuer may exercise the right of redemption. 5, by way of redemption. When the execution of the right of redemption, the Issuer may pay principal and interest of the bonds in two ways: one is paid in cash, known as a hard redemption. The other is a new issue of warrants, convertible bonds or other financial instruments to achieve redemption, called soft redemption. 6, redeemed tips of. In convertible bonds issued publicly redemption notice should, should determine whether a particular day as the date of redemption, the date of the deadline of the debt can be transferred and posted to the redemption date, the redemption notice should during the cue period, is redeemed. Bonds right of redemption of convertible bonds the value of call option value. Value of the bonds is equal to the value of the bond plus the value of the bonds contained in the European options, the issuing company is always hope to get more control over the right of redemption is as little as possible investor protection, redeemed security held by investors that the value of the call option, because it allows more time to bond holders to shares rose to a satisfactory price level. In stock prices, the price of convertible bonds will sync up, let the market without risk arbitrage opportunities. If there is no redemption protection, this part of the profit at any time may be redeemed and can not be achieved, making the bonds less attractive. Risk - benefit analysis, we can see that three of the different types of risks and benefits, the right of redemption demands performance of different redeemable convertible bond issues, shareholders and investors. In accordance with the law and economics of game theory, individual actors to maximize the return is bound with the proceeds of other actors maximize conflict with each other and influence each other. Therefore, the practice does not exist actors gain absolute maximize only possible to achieve income relative to maximize the costs and benefits of the actors to maximize in equilibrium. Balanced, refers to actors in an interactive process, all of the actors at the same time to achieve the goal of maximizing value tends to persistent form of interaction and formal in which the interaction of the various actors in this role, the status of the constraints. In convertible bonds throughout the operation of the market process, the most able to achieve the issuing companies, the balance of interests between the original shareholders and investors, that is, can be transferred to the smooth realization of the debt-equity swap function, all three parties are successful conversion of convertible bonds in income relative maximize. In convertible bonds issued to the end of the duration of the right of redemption is the only force investors to speed up the conversion rights, and upon redemption will be irrevocable success has an important influence on whether the conversion of convertible bonds . Therefore, the design established under the premise of the right of redemption, redemption timing - redemption policy issues, has become a focus of convertible bond issues, shareholders and investors of common concern. Berman Schwartz (1977) research as the main representative, in symmetrical assume that the company managers and investors under the premise that the best timing of redemption, when the conversion value of the convertible bonds (conversion value) equal to the redemption price (call price). However, Ingergsoll (1977) selected 179 listed companies in 1968-1975 issuance of convertible bonds, their redemption strategy empirical analysis found that 9, all the rest of the company's redemption delayed long. Limited number of issuers in the underlying stock price does not reach the theoretical minima redeemed before special reasons, but also because of the need to simplify the capital structure before the merger behavior. This paper argues that the real reason to postpone the redemption is the issue of the decision of the management of the Company to the institutional arrangements of the redemption policy. The modern theory of the firm concluded that the \may expand the scale of enterprises, in order to expand the number of its actual assets available to form overinvestment; or worried about the deteriorating financial position, the enterprise bankruptcy, etc., to damage their own status and economic interests, and therefore lead to underinvestment. The two opportunistic tendencies will make the issue of the management of the Company decide to redeem strategy to postpone the timing of redemption to the theoretical minima, in order to ensure the success of the conversion. In the former case, the conversion success of the conversion of debt into equity, do not have debt service, so that the increase in disposable corporate assets. And by giving investors more investment income, which will help enhance the image of the enterprise market, implementation of the new financing plan; in the latter case, the successful conversion to improve the financial situation of enterprises, decrease in liabilities, capital increase, reducing the risk of enterprise , in order to protect the the management vested interests. On the basis of the conclusions of the above analysis, the paper analyzes the status quo of China's convertible bonds redemption rights legal system and market practice, summed up the problems to be solved, and appropriate to relax the restrictions on the duration of the convertible bonds, the lifting of the redemption restrictions on the way to standardize the different types of call option specification system of redemption prompt and the importance of the role of special redemption rights point of view, to improve our system of convertible bonds redemption right to put forward suggestions for improvement. Of existing research on the legal system of the convertible bond redemption right, stays in the definition of the right of redemption, a brief description of the constituent elements and functions level, preliminary absorb and learn from the finance research, but also in the cross- interdisciplinary study of the initial stage. The downside is that the conclusion of the study is rather vague, lack of systematic research and practice material support, yet specializes in convertible bonds redemption rights legal system research. The innovation of this paper is that more in-depth cross-interdisciplinary research on the legal system of convertible bonds redemption right, the conclusion of the study finance at the latest research results and the strong support of China's capital market practice, and convertible bonds in China redemption right legal system, put forward the suggestions for improvement.

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CLC: > Political, legal > Legal > Chinese law > Financial Law > Securities and Management Act
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