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Source: Securities Times

After Soute Bond Refund failed to pay the repurchase funds and interest, constituting a substantial default, Landun Bond Refund also failed to pay the principal and interest on the due date, becoming the second convertible bond to default in history.

On the evening of August 13, Blue Shield Debt Repayment announced that the company’s main bank accounts and assets had been frozen/seized by the court, and there was a serious shortage of funds. The principal and interest of the Blue Shield Debt Repayment convertible bonds that should have been paid on August 13 could not be redeemed on time.

The default of Blue Shield’s bond repayment has undoubtedly once again sounded the alarm for investors who invested in low-quality convertible bonds. Many analysts told the Securities Times reporter that the default of Blue Shield’s bond repayment may lead the market to reassess the credit risk of similar low-quality convertible bonds, triggering the market’s risk aversion towards such bonds.

Blue Shield defaults on debt repayment

According to the prospectus for Blue Shield's bond repayment, Blue Shield issued 5.38 million convertible bonds on August 13, 2018, with a duration of 6 years, that is, the maturity date is August 13, 2024. The company paid the principal and the last year's interest of Blue Shield's bond repayment on August 13, 2024.

According to the issuance announcement of the convertible bond, the coupon rate of Blue Shield's convertible bonds will be 0.4% in the first year, 0.6% in the second year, 1.0% in the third year, 1.5% in the fourth year, 1.8% in the fifth year, and 2.0% in the sixth year.

However, Blue Shield announced that the company has failed to raise funds to repay the principal and interest, and will not be able to repay the principal and interest of the bonds on time. At the same time, the company said that its main bank accounts and assets have been frozen/sealed by the court, and it is seriously short of funds.

In fact, Blue Shield's convertible bonds have been listed for transfer in the delisting sector in September 2023. The delisting of Blue Shield's convertible bonds was mainly due to the poor performance of its issuer for several consecutive years, and an audit report with no opinion was issued. According to relevant regulations and the review opinions of the Listing Review Committee, the Shenzhen Stock Exchange decided to terminate the listing of the company's stocks and Blue Shield convertible bonds.

Before entering the delisting sector, the price of Blue Shield convertible bonds had fallen to as low as 24.501 yuan; after entering the delisting sector, the price of Blue Shield's bond withdrawal continued to rise, with the highest agreed transfer price even reaching 106.681 yuan. Many investors expected that the scale of Blue Shield's bond withdrawal was less than 100 million yuan, which could be easily digested by reducing the conversion price, and the company had announced the reduction of the conversion price many times.

However, as Blue Shield’s bond repayments were in substantial default, some investors’ illusions were shattered. The company said that since the company’s convertible bonds had been in substantial default, the company would convene a bondholders’ meeting at an appropriate time in accordance with the “Blue Shield Information Security Technology Co., Ltd. Convertible Corporate Bondholders’ Meeting Rules”.

Recently, Blue Shield has repeatedly warned investors of risks, reminding them that the principal and interest of the convertible bonds may not be paid on time. Lianhe Credit decided to terminate the credit rating of the company and related bonds at the end of June this year. According to the latest rating results, the company's long-term credit rating is CC, Blue Shield's credit rating is CC, and the rating outlook is negative.

Before Blue Shield’s bond repayment, Soute’s bond repayment also constituted a substantial default due to its inability to pay the repurchase amount and interest. In May 2024, Soute issued an announcement on the results of the convertible bond repurchase, stating that the company’s current available cash balance could not cover the remaining total face value and interest of Soute’s bond repayment, and the company was unable to repay the repurchase principal and interest due to insufficient liquidity. Soute’s convertible bond became the first convertible bond in my country’s history to have a substantial default, breaking the 30-year record of zero defaults in the convertible bond market.

Credit risk expands again

Looking back at history, before 2020, convertible bonds were basically withdrawn in the form of equity conversion, and issuers could generally promote equity conversion through forced redemption or downward revision. After 2020, the delisting of the underlying stock and the default of credit bonds caused the prices of related convertible bonds to fall sharply, and credit risk began to attract market attention. Since 2023, with the substantial default of Soute convertible bonds, the delisting of the underlying stock and debt restructuring have caused concerns about the repayment of principal and interest, and credit risk has expanded again.

So far, the convertible bonds that have been delisted or locked in delisting include Soute, Landun, Hongda and Guanghui. Zhengbang and Quanzhu convertible bonds matured early due to the bankruptcy of the underlying stocks, and were repaid according to the repayment plan in accordance with ordinary claims.

On April 12, 2024, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market", the new "Nine National Regulations", which emphasized "deepening the reform of the delisting system and accelerating the formation of a normalized pattern of delisting all that should be delisted and clearing out in a timely manner". Subsequently, the China Securities Regulatory Commission issued the "Opinions on Strictly Implementing the Delisting System", and the Shanghai and Shenzhen Stock Exchanges simultaneously revised the delisting rules.

The new delisting rules further raise the requirements for trading and financial indicators, and significantly lower the threshold for delisting due to financial fraud. Huaan Securities believes that with the revision of the new "Nine National Regulations" and stock listing rules, the stock market delisting rules are becoming increasingly strict, and existing convertible bond issuers will face greater delisting pressure, and the risk of delisting of underlying stocks will become a more common situation.

It is worth noting that before convertible bonds are delisted, regulators often issue inquiry letters to alert companies of potential risks. Huaan Securities believes that delisted companies usually face major uncertainties in their continued operations and have a worrying debt repayment capacity. Once a credit default actually occurs, the specific repayment plans vary greatly from company to company, and it will be difficult to guarantee the interests of investors.

"The continuous occurrence of default risks in the convertible bond market will impact investors' confidence in the convertible bond market and reduce market liquidity and activity. In this process, products with weak credit qualifications will be hit harder." Yuan Huaming, general manager of Huahui Chuangfu Investment, said in an interview with a Securities Times reporter.

Promoting the healthy development of the convertible bond market

Blue Shield's default on its debt repayment is undoubtedly another reminder for investors to strengthen their professional research on corporate operations and asset pricing. Yuan Huaming said that investors should try to avoid such losses caused by stock and bond declines due to operational problems, rather than blindly believe in various so-called "rigid redemptions".

"In the face of rising credit risks, investors may need to change their investment strategies, reduce their holdings of high-risk bonds, and turn to more stable investment targets." Yao Xusheng, a wealth manager at Paipai.com, told a Securities Times reporter that convertible bond defaults will affect market sentiment, leading to a decline in the overall market demand for convertible bonds and increased price volatility.

Specifically, profitability and cash acquisition ability, company qualifications and debt repayment ability are the main indicators for assessing convertible bond risks. Huaan Securities believes that profitability and cash acquisition ability are important indicators for assessing the financial health of enterprises. The former is measured by main business income and various profit margins, and the latter is reflected by cash flow from operating, investment and financing activities. Company qualifications include inquiry letters, credit ratings and equity pledge rates, which reflect the operating strength and stability of the enterprise. Debt repayment ability assesses the ability of enterprises to repay debts on time through indicators such as liquid assets, debt-to-asset ratio and net cash flow. These indicators together provide investors with a comprehensive risk analysis.

Convertible bonds are a type of product that can be used for both offense and defense. In the past, investors could basically "win without doing anything" by simply grasping the "double-low strategy". Nowadays, as some underlying stocks are at risk of delisting and convertible bond defaults occur from time to time, convertible bond prices are constantly breaking record lows.

Industry insiders pointed out that regulatory authorities can further strengthen supervision of the convertible bond market and ensure market stability and healthy development by improving the regulatory system, strengthening market access management, strengthening transaction supervision, strengthening risk prevention, and strengthening cooperation and coordination.