According to Caixin, on December 18, Reporter Shi Sitong reported that "Forcefully redeeming all unconverted 'Bank Of Chengdu Convertible Bonds'! Since November 7, in 15 trading days, the closing price of Bank Of Chengdu's stock has exceeded 1.3 times the current conversion price of the Convertible Bonds (15.899 yuan/share), successfully triggering the strong redemption clause, and Bank Of Chengdu subsequently announced its decision to exercise the early redemption right.

In the view of industry experts, Bank Of Chengdu's stock price is performing well; early redemption of Convertible Bonds can reduce future interest expenses for the bank and may also encourage some Convertible Bonds investors to hasten their decision to convert. According to data, as of the close on December 18, Bank Of Chengdu's stock was at 16.32 yuan/share, with a drop of 0.91% on that day.

However, for Convertible Bonds investors, "if forced to redeem, there may be significant investment losses." Industry insiders suggest that investors may operate based on their expectations of Bank Of Chengdu's stock price; if they believe the stock price will rise in the future, they can convert in time to enjoy the benefits of this price increase; conversely, they should quickly sell at a suitable price in the secondary market to realize profits.

According to Wind data, the current conversion pace of Bank Of Chengdu's Convertible Bond investors is accelerating. As of December 18, the proportion of unconverted bonds has decreased from 40.15% a week ago to 28.32%, with the latest unconverted balance at 2.266 billion yuan.

With the imminent strong redemption of Bank Of Chengdu's Convertible Bonds, how should Convertible Bond investors operate?

Specifically, on April 6, 2022, Bank Of Chengdu publicly issued 80 million A-share Convertible Bonds (total issuance of 8 billion yuan), which are traded on the Shanghai Stock Exchange under the abbreviation "成银转债". At the same time, "成银转债" includes conditional redemption terms, with the triggering condition being that the closing price of the bank's stock does not fall below 130% (including 130%) of the current conversion price for at least 15 trading days out of 30 consecutive trading days.

From the perspective of the conversion price, 'Bank Of Chengdu Convertible Bonds' can be converted since September 9, 2022, with an initial conversion price of 14.53 yuan/share. After three annual cash dividends, the current conversion price has fallen to 12.23 yuan/share. In terms of stock performance, since November 7, the bank's stock has achieved a closing price not lower than 1.3 times the current conversion price of the 'Bank Of Chengdu Convertible Bonds' (i.e., 15.899 yuan/share) on 15 trading days, triggering the conditional redemption clause of the Convertible Bonds.

Subsequently, the Board of Directors of Bank Of Chengdu decided to exercise its early redemption rights on Convertible Bonds, redeeming all unconverted 'Chengyin Convertible Bonds' at the bond face value plus the current accrued interest after the close on the redemption registration date.

The early redemption of Convertible Bonds by Bank Of Chengdu is a decision made based on the terms of the Convertible Bonds and its own Operation strategy, said Zheng Jiawei, the Chief Analyst of Fixed Income at Yongxing Securities. From the terms perspective, the redemption clause was established when the Convertible Bonds were issued, and currently, its stock price meets the corresponding triggering condition; from the viewpoint of Bank Of Chengdu itself, the current stock price performance is good, and redeeming the Convertible Bonds can reduce future interest expenses.

However, for the investors holding the Convertible Bonds, in the case that Bank Of Chengdu decides to exercise the early redemption right, besides continuing to Trade the bonds in the secondary market within the stipulated timeframe or converting them at the conversion price of 12.23 yuan per share, they can only choose to be forcibly redeemed at the face value of 100 yuan per bond plus the accrued interest for the period. "If forcibly redeemed, it may result in significant investment losses," Bank Of Chengdu warned.

In response, Zheng Jiawei further analyzed that if investors expect the stock price of Bank Of Chengdu to rise in the future, they can choose to convert shares at a price of 12.23 yuan per share, thus enjoying the benefits brought by the increase in stock price. If investors are uncertain about the stock price trend, they can quickly sell in the secondary market at a suitable price to profit. However, if investors do not take action and choose to be forcibly redeemed at a face value of 100 yuan per bond plus the current accrued interest, they may face some degree of loss.

Forced redemption may encourage investors to accelerate conversion, which could effectively relieve core Tier 1 capital.

It is worth mentioning that generally, banks issue Convertible Bonds mainly to supplement core Tier 1 capital, but Convertible Bonds can only achieve capital supplementation after conversion. From the perspective of industry insiders, if Convertible Bonds are redeemed at maturity with a low conversion ratio, it may not be beneficial for the bank's own capital structure planning, and may not effectively alleviate the pressure on the bank's core Tier 1 capital.

In this regard, Bank Of Chengdu had previously made it clear that the funds raised from this issuance of Convertible Bonds, after deducting the issuance costs, will be fully used to support the development of the company's future Business. After the Convertible Bonds holders convert their bonds, the funds will be used to replenish core tier one capital according to relevant regulatory requirements.

From the actual conversion situation, according to disclosures from Bank Of Chengdu, as of December 11, a total of 4.788 billion yuan 'Chengyin Convertible Bonds' have been converted into common shares of the bank, accounting for 59.85% of the total issued amount of Chengyin Convertible Bonds. The unconverted ratio still exceeds 40%, raising the question of whether forcing the redemption of all unconverted Convertible Bonds goes against the original intention of "supplementing core Tier 1 capital"?

Although under the current conversion ratio, exercising the redemption right may not necessarily be detrimental to supplementing core Tier 1 capital. In Zheng Jiawei's view, on one hand, mandatory redemption may prompt some Convertible Bonds investors to accelerate their conversion decisions; on the other hand, Bank Of Chengdu may have comprehensively considered various factors, such as its own capital adequacy ratio, market conditions, and future channels for capital supplementation to enhance his Tier 1 capital adequacy ratio.

In fact, according to Wind data, the current pace of conversion among Chengyin Convertible Bonds investors is accelerating. As of December 18, the proportion of unconverted Chengyin Convertible Bonds has dropped to 28.32%, with an unconverted balance of 2.266 billion yuan.

However, overall, the current conversion ratio of bank Convertible Bonds is generally not high. Wind data shows that among the 13 types of existing bank Convertible Bonds in the market, only five—CITIC Convertible Bonds, Chengyin Convertible Bonds, Nanyin Convertible Bonds, Qilu Convertible Bonds, and Suhang Convertible Bonds—have a non-conversion ratio of less than 90%. Among the remaining Convertible Bonds, except for Hangyin Convertible Bonds which have a conversion rate of about 5.4%, the others all have conversion rates below 0.1%.

Currently, the low conversion ratio of bank Convertible Bonds reflects a cautious attitude among investors regarding the valuation of bank Stocks and the future price trends. Zheng Jiawei believes that the low conversion ratio of bank Convertible Bonds may be due to the low valuation of bank Stocks and the unclear future development prospects.

Therefore, he suggests that banks can adopt various measures to increase the conversion ratio, such as improving their business performance and reducing non-performing rates to enhance stock price attractiveness, thereby encouraging more Convertible Bonds investors to convert; at the same time, strengthen Analyst research and investor communication so that more investors understand the bank's Global Strategy and business prospects, thereby enhancing investor confidence in bank Stocks, etc.