On September 28th, Fangyuan News Agency (Reporter: Shi Sitong) reported that another bank's convertible bonds is about to be redeemed.

Since the beginning of this year, after the redemptions of Jiangyin convertible bonds, Wuxi convertible bonds, and Sunong convertible bonds, jiangsu zhangjiagang rural commercial bank has also issued a reminder announcement for its convertible bonds that will soon mature. Zhangjiagang rural commercial bank's convertible bonds will become the fourth bank's convertible bonds to be delisted this year.

Of note, convertible bonds can only supplement core Tier 1 capital after conversion, and the latest conversion ratio of jiangsu zhangjiagang rural commercial bank's convertible bonds is only 24.21%. At the same time, the remaining 13 outstanding bank convertible bonds in the current market also generally have low conversion ratios, with 11 of them having conversion ratios of less than 20%.

In the opinion of industry experts, the redemption of convertible bonds with low conversion ratios is not beneficial for the bank's own capital structure planning and will also increase the debt repayment pressure on maturity dates for banks. However, currently, with the stock price of jiangsu zhangjiagang rural commercial bank slightly higher than the conversion price, and with the boost in A-share market sentiment, some convertible bond holders may have a certain willingness to convert.

Zhangjiagang rural commercial bank's convertible bonds are about to mature, with the latest conversion ratio being only 24%.

Specifically, on November 12, 2018, jiangsu zhangjiagang rural commercial bank publicly issued convertible enterprise bonds worth a total face value of 2.5 billion yuan through the Shenzhen Stock Exchange, named "jiangsu zhangjiagang rural commercial bank's convertible bonds", with a term of 6 years. After maturity, jiangsu zhangjiagang rural commercial bank's convertible bonds will cease trading on November 8, 2024, and be delisted from the Shenzhen Stock Exchange starting from November 13.

Now, the 6-year term is quietly coming to an end. Zhangjiagang rural commercial bank has issued a notice reminding that November 7th is the last trading day for the convertible bonds. After trading ceases, before the conversion period ends (from November 8th to 12th), convertible bond holders can still convert the convertible bonds into the bank's ordinary A-shares based on the agreed conditions.

Meanwhile, within five trading days after the expiration of the convertible bonds, Jiangsu Zhangjiagang Rural Commercial Bank will redeem all unconverted convertible bonds from investors at a price of 109% of the face value of the convertible bonds (i.e. 109 yuan per bond).

Caixin reporters noted that convertible bonds issued by banks are generally used to supplement Tier 1 capital, but Tier 1 capital can only be supplemented after conversion. From the current conversion situation, as of the close of September 27th, the latest conversion ratio of Zhangjiagang Rural Commercial Bank's convertible bonds is only 24.21%.

In this regard, it is widely believed in the industry that a low conversion ratio of convertible bonds may not effectively alleviate the pressure on the core Tier 1 capital of banks. According to Wang Yifeng, Chief Analyst of the Financial Industry at Everbright Securities, the redemption of convertible bonds at the end of the term with a low conversion ratio is unfavorable for the bank's own capital structure planning, and will also increase the debt repayment pressure on the bank's maturity date.

At the same time, Zheng Jiawei, Chief Analyst at Yongxing Securities Research Institute, pointed out that if direct redemption is made at maturity, it not only contradicts the original purpose of banks issuing convertible bonds to supplement core capital, but also requires payment of bond interest, increasing the cost of liabilities, and impacting the overall bearish sentiment towards the bank.

Therefore, he believes that in the future, Jiangsu Zhangjiagang Rural Commercial Bank may promote the conversion enthusiasm of investors through announcements, investor relations activities, or even adjusting the conversion price, to increase the conversion ratio as much as possible and thus supplement its core Tier 1 capital.

When the stock price is higher than the conversion price, the bullish sentiment in the A-share market may drive the conversion of convertible bonds.

"Investors considering conversion will take into account Jiangsu Zhangjiagang Rural Commercial Bank's own operations and factors such as secondary market stock price performance. In terms of price, the current stock price of Jiangsu Zhangjiagang Rural Commercial Bank is slightly higher than the conversion price, which is somewhat attractive to convertible bond holders," said Zheng Jiawei.

In fact, from the perspective of the stock price, in recent days, after a period of decline, Jiangsu Zhangjiagang Rural Commercial Bank has seen a rebound, with the stock price rising for seven consecutive trading days. The closing price on September 27th was 4.18 yuan per share. In comparison, the current conversion price of Zhangjiagang Rural Commercial Bank's convertible bonds is 4.13 yuan per share.

As for whether to convert the bonds into shares, Zheng Jiawei suggests that investors can compare the returns of converting bonds into shares and redeeming bonds directly, taking into account the relevant risks. If you choose to hold convertible bonds until maturity, you can obtain fixed income through Zhangjiagang Rural Commercial Bank's 109% redemption price, while converting into shares may face the risk of Zhangjiagang Rural Commercial Bank's stock price fluctuations.

It is worth noting that compared to other bank convertible bonds, Zhangjiagang Rural Commercial Bank's conversion ratio is already at a relatively high level. As of now, among the 14 outstanding convertible bonds in the market, only Purple Silver Convertible Bond, Qingnong Convertible Bond, and Zhangjiagang Rural Commercial Bank's convertible bond have a conversion ratio exceeding 20%, while Industrial Bank Convertible Bond, Shanghai Pudong Development Bank Convertible Bond, and 5 other convertible bonds have a conversion ratio of less than 10%.

Looking at the conversion premium rate, currently, 7 out of the 14 bank convertible bonds have a conversion premium rate exceeding 20%. Among them, Qingnong Convertible Bond has a high conversion premium rate of 57.09%, while Purple Silver Convertible Bond, Shanghai Pudong Development Bank Convertible Bond, Bank of Communications Convertible Bond, and Zhongyin Bank Convertible Bond have conversion premium rates of 47.94%, 44.91%, 43.75%, and 41.08% respectively.

In response to this, some industry analysts told Caijing reporters that in recent years, the volatility of the equity market has been high, the valuation of the banking sector is low, and the high conversion premium rate reflects the issuer's confidence in the future stock price, but for convertible bond investors, they face higher transaction costs, etc., and investors need to comprehensively consider their own investment characteristics, risk tolerance, market trends, etc., in making decisions.

At the same time, in Zheng Jiawei's view, the current valuation level of bank convertible bonds is low. With the subsequent improvement of banks' interest spreads and profitability, the trend of the underlying stocks is good, and bank convertible bonds will also encounter relatively good opportunities. "Recently, the sentiment in the A-share market has significantly improved. If holders are bullish on the future prospects of bank stocks, converting bonds into shares also has certain investment value." he stated.