Debt Accumulation Cumulative Preference Shares Can Play The Role Of "One Arrow, Three Carvings".

How to make use of "debt to equity swap" effectively, effectively and effectively, so as to achieve the rescue of the enterprises temporarily facing difficulties, and avoid the "botnet enterprise" escaping from the net, and avoid the "three effects" of the banks being evaded by malicious debts?

And the debt accumulation cumulative preferred stock can play the role of "one arrow, three carvings".

The article also emphasizes that up to now, there is no specific provision for the risk weights of preferred stock, whether it is the Basel agreement or the relevant regulatory policies in China.

This leaves a valuable policy space for the risk weighting of China's future revision of the law.

It is proposed to give full consideration to the strong creditor's rights characteristics of preferred stock in the protection of creditors' rights and interests, and to give risk weights roughly similar to those of normal loans.

Debt to equity swap, that is, debt equity, is essentially in order to make use of the difference between the creditor's right and the real right in terms of legal attributes. By reducing the principal and interest expenses of the enterprise loans and increasing the capital of the enterprise, the purpose of turning the losses into the enterprise will eventually be achieved.

At present, there is a big controversy about debt to equity swap in China.

Proponents believe that for enterprises, debt to equity swap can directly and quickly reduce the asset liability ratio of enterprises, and play a fast role in the "deleveraging"; for banks, it can also effectively curb the rising rate of non-performing loans.

Opponents believe that for enterprises, banks as shareholders enter the board of directors, but they usually do not understand the operation of enterprises, often interfere with and restrict the normal operation of enterprises. For banks, they mean abandoning the rights and interests of the compensation series. In the specific implementation, they may not be able to effectively identify which enterprises are actually cyclical and can turn shares and what is "zombie enterprises".

And making the debt to equity swap easy to become an enterprise's rigid and immortal way for banks to escape debts and "zombie enterprises", and more importantly, according to the provisions of the Basel agreement, the high risk capital occupied by equity in the bank's balance sheet will also be a great challenge.

However, it is not difficult to find that if the debt to equity swap is not a common stock but a preferred stock option, the dispute is expected to be solved.

The problem of debt to equity preferred in China at present

First of all, relevant laws need to be adjusted and perfected.

Mainly in two aspects: first, the convergence of preferred shares and existing laws.

China's related laws on preferred stock are mainly the guiding opinions of the State Council on launching the trial of preference shares issued by the State Council in November 2013 and the "preferred stock pilot management measures" promulgated by the China Securities Regulatory Commission in March 2014, but this provision is too simple. The current legislation on the company law, the securities law and the bankruptcy law has not clearly covered the relevant provisions of the preferred stock before the two documents of the State Council and the securities and Futures Commission on the preferred stock, which resulted in the unsettled issues in many preferred stock pilot methods.

Two, the forty-third provision of the commercial banking law stipulates: "commercial banks should not engage in trust investment and securities business in People's Republic of China, nor invest in real estate for non personal use or invest in non bank financial institutions and enterprises, except in other countries."

This means that commercial banks are in principle prohibited from holding corporate shares.

Not only that, but in practice, most of them have adopted the special way approved by the State Council to carry out debt to equity swap, considering that the number of enterprises that need debt to equity swap in the future may be more, and creditors are mainly banks. If they need to be approved by the State Council one by one, the operation is not feasible.

Therefore, it is urgent to modify the commercial bank law.

Secondly, it is about the risk weight of holding equity in commercial banks.

The forty-second and second paragraphs of our commercial bank law clearly stipulate that "the real estate or share rights acquired by commercial banks because of the exercise of mortgage and pledge shall be punished within two years from the date of acquisition."

In connection with the provisions of the commercial bank act, in 2012, the sixty-eighth regulation of the capital adequacy ratio of commercial banks (Trial Implementation) promulgated by the China Banking Regulatory Commission (CBRC Order No. [2012]1) stipulates that the risk weights of commercial banks in the period of disposal of shares held by commercial banks passively are 400%, and the risk weights approved by the State Council through special approval by the State Council are also 400%, but the risk weights of other equity investments are 1250%.

At present, the capital adequacy ratio of commercial banks in China is facing greater pressure. Higher risk weights will cause excessive capital consumption, which will further increase the difficulty of maintaining capital adequacy ratio and weaken the incentive of commercial banks to participate in debt to equity swap.

For example, if the risk weight of equity is increased to 1250%, from the perspective of capital consumption, commercial banks will make this part of the creditor's rights become a bad asset and save more capital than pferring shares.

It must be pointed out that the above provisions point more to common stock.

Up to now, there is no specific provision for the risk weighting of preferred stock, whether it is the Basel agreement or China's relevant regulatory policies.

This leaves a valuable policy space for the risk weighting of China's future revision of the law.

It is proposed to give full consideration to the strong creditor's rights characteristics of preferred stock in the protection of creditors' rights and interests, and to give risk weights roughly similar to those of normal loans.

Finally, the tax issue of preferred stock.

In accordance with our current tax provisions on preferred stock, dividends from preferred stock can be distributed to investors from the company's net profit and cannot be deducted before tax.

Compared with bonds, this increases the burden on investors of preferred stock, and can be used for reference from the experience of tax exemption for preferred stock in the United States.

In the tax reform act of the United States, it is stipulated clearly that the preferred stock and dividends obtained by corporate investors can enjoy a 70% tax relief. Meanwhile, the Internal Revenue Department stipulates that the dividends paid by the parent company to issue trust preferred shares can be deducted before tax, thus allowing the tax avoidance method of trust preferred stock.

The preferred stock index is a stock that has both the characteristics of equity capital and the characteristics of debt. Compared with common stock, preferred stock has the following characteristics: fixed income, priority dividend, priority payment and limited rights.

Therefore, it can effectively overcome the problems mentioned above.

First of all, it is a win-win for enterprises and banks.

The preferred stock has fixed return, but it does not need to pay regular interest at regular intervals. It only requires dividends when the company gets profits, which helps to help the enterprise tide over the temporary difficulties.

At the same time, as long as there is profit, it is necessary to pay dividends (especially the cumulative preferred stock), which can effectively curb the motives of enterprises to evade debts and avoid the damage of bank interests.

Second, it helps to curb the driving force of "zombie enterprises" debt to equity swap.

Compared with the creditor's rights, preference shares only give enterprises the time to buffer themselves through difficulties. They do not end up without debt service (in the case of repurchase agreements), that is to say, enterprises want to evade debts and are unable to escape.

Therefore, as a "signal screening mechanism", it objectively helps to screen and avoid the invalid debt to equity swap of "zombie enterprises".

Third, it helps to avoid excessive intervention by banks in normal operation of enterprises.

If the debt to equity swap is converted into a common stock, it will dilute the existing shareholders' rights and interests. At the same time, banks also need to be stationed in the directors. The directors of banks usually do not operate professionally to the specific enterprises. Therefore, in order to ensure that the enterprises repay debts, the directors of banks can form excessive intervention on the operation of the enterprises and are unfavorable to the development of the enterprises.

If the bank becomes a preferred stock, the bank does not have the right to vote. Only the right to know, the right to advise and the right to question (veto power under special circumstances) will help enterprises operate independently and independently.

Preferred stock has been developing in the United States for more than 100 years, and now it has become a relatively mature and commonly used form of equity.

In the financial crisis, in order to save liquidity, capital shortage and precarious financial institutions, in September 20, 2008, the US Treasury put forward the "troubled assets relief plan" (TARP), trying to inject capital into the US bank with preferred stock, and agreed that the first 5 years of dividends were 5%, and sixth years began to be 9%.

According to incomplete statistics, as of 2011, the United States government preferred shares or preferred assets related to financial assets amounted to 214 billion 700 million U.S. dollars, accounting for about 700 billion of the United States $31% of the rescue fund, which became the government's preferred tool to deal with the crisis.

As of November 2014, the United States has accumulated more than $50 billion in earnings from the purchase of preferred stock by financial institutions, with an average return of more than 12%.

Stones from other hills can be used to attack jade.

It is not difficult to see that the US rescue measures can achieve good results, which is closely related to the careful design of the capital injection clause.

In order to protect and realize the corresponding rights of preferred stock, we must set strict conditions for the financial institutions to be injected.

First, pay attention to the protection of the rights and interests of preferred shareholders.

The dividends paid to ordinary shareholders by the capital injection company must be approved by the US Treasury before the company repurchases the common stock.

At the same time, the investor has the right to assess the specific amount and price of the dividends paid and decide whether to implement further restrictions.

Under certain circumstances, preferred shareholders have the right to exercise participation and veto power over matters that may affect their interests.

For example, the purchase agreement of Citibank preferred stock clearly stipulates that "if the 6 dividend payment fails to fully pay the preferred dividend, the preferred shareholders have the right to elect two managers, and even if necessary, they can directly participate in the management and voting of major matters of the company".

Second, curb excessive incentives for corporate executives.

In order to prevent the decline of corporate debt due to excessive incentives, the US government has formulated detailed restrictions.

For example, the upper limit of the duty-free pay limit for top management of the company is $500 thousand, which can not be increased; no unnecessary excessive incentive plan should be set up; no company turnover allowance should be given.

For example, the core requirement for the purchase of AIG preferred stock is to freeze and withdraw the annual bonus of 70 executives, and explicitly restrict AIG's golden parachute plan.

Third, ensure the smooth exit of preferred stock investment.

The redemption clause mainly refers to the agreement that the issuer of preferred stock obtains the issued preferred stock from the investors by paying the corresponding consideration, and realizes the agreement of payment and cancellation.

In the financial crisis, the US government adopted the arbitrary redemption provision in the agreements concluded with the relevant financial institutions, that is, investors have the right to decide and negotiate for redemption time and price.

For example, in the agreement with Citibank, it was agreed: "the preferred stock redemption method needs the mutual recognition between the government and the government, and the issuer shall not set the redemption clause."

Although there is no provision for the issuer to repurchase, if the rescued enterprise passes the difficult period, the preferred stock can actually adopt a broader exit way than the set repo.

After the continuous improvement of the leverage ratio and deleveraging have become the key point of policy, the problem of debt to equity swap has been put on the agenda again after 20 years.

In March 24th this year, Premier Li Keqiang of the State Council, speaking at the Boao forum for Asia, said that the market will be used to promote debt to equity swap and explore the use of debt to equity swap to reduce corporate leverage.

In May 9th, the authorities demanded: "for those enterprises that are really unable to save, the closed ones must be closed down, and the bankrupt will be resolutely bankrupted."

It shows how to make use of the "debt to equity swap" with a strong, effective and effective way to relieve the enterprises that face difficulties for the time being, at the same time, to avoid the "zombie enterprise" that really should be left out of the net, and to avoid the "three effects" of the bank's malicious evasion of debt, and need an incentive and compatible system design.

According to the research of Xingye Bank, the debt accumulation cumulative preferred stock can play the role of "one arrow, three carvings".