According to a report from Financial Network on January 9 (Reporter Shi Sitong), last evening, the Bank of Suzhou disclosed a shareholding plan of 0.3 billion yuan by its major shareholder, Guofa Group, and also released a prompt announcement regarding the potential fulfillment of redemption conditions for the 'Bank of Suzhou Convertible Bonds'.

It is reported that if the bank's stock closing price is not lower than 8.05 yuan per share for 5 out of the next 11 trading days, it will trigger the conditional redemption clause for the 'Bank of Suzhou Convertible Bonds'. However, from the conversion situation, as of the end of last December, more than 79% of the Bank of Suzhou Convertible Bonds had not yet been converted.

Insiders believe that if the Bank of Suzhou Convertible Bonds successfully trigger early redemption, the Bank of Suzhou will likely choose to redeem the remaining convertible bonds in advance. Considering the conversion situation of the Bank of Suzhou Convertible Bonds and the optimization of the bank's capital structure, it might be a better choice for Guofa Group to purchase convertible bonds in order to increase shareholding while further improving the conversion rate.

The Bank of Suzhou Convertible Bonds are expected to trigger early redemption, and major shareholder Guofa Group has disclosed a 0.3 billion yuan shareholding plan.

Specifically, Guofa Group plans to increase its holdings in the Bank of Suzhou for no less than 0.3 billion yuan RMB through the Shenzhen Stock Exchange trading system by way of centralized bidding or purchasing convertible bonds starting from January 14 for a period of 6 months, and there is no price range set for this shareholding plan.

It is reported that the funds for this shareholding come from its own capital. Regarding the reasons for this increase in holdings, Guofa Group stated that it is based on confidence in the future development prospects of the Bank of Suzhou and recognition of its long-term investment value.

However, it is worth noting that on the same day that the major shareholder disclosed its shareholding plan, the Bank of Suzhou also released a prompt announcement regarding the potential fulfillment of redemption conditions for the 'Bank of Suzhou Convertible Bonds'. In this regard, the industry generally believes that Guofa Group's shareholding plan may be related to the potential for the Bank of Suzhou Convertible Bonds to trigger early redemption.

According to Zheng Jiawei, Chief Analyst of Fixed Income at Yongxing Securities, the Shareholding plan can stabilize stock prices, increase market confidence in the Bank Of Suzhou's Stocks, and improve the possibility of converting Convertible Bonds into Stocks. If the stock price can stabilize above the redemption price, the probability of converting bonds into stocks will increase, which is beneficial for optimizing the bank's capital structure.

From the announcement, in the 19 trading days from December 12, 2024, to January 8, 2025, the closing price of the Bank Of Suzhou's Stocks has been no less than 130% of the current conversion price of the "Su Bank Convertible Bonds" at 6.19 yuan/share, which is 8.05 yuan/share on 10 trading days.

If in the next 11 trading days, there are 5 trading days where the closing price of the Bank's Stocks is no less than 8.05 yuan/share, it will trigger the conditional redemption clause of the "Su Bank Convertible Bonds". At that time, according to the relevant agreement, the Bank Of Suzhou has the right to decide to redeem all or part of the unconverted Convertible Bonds at the bond face value plus the current accrued interest.

It is understood that the Bank Of Suzhou publicly issued 5 billion yuan of "Su Bank Convertible Bonds" in April 2021, with a term of 6 years and coupon rates of 0.20% in the first year, 0.40% in the second year, 1.00% in the third year, 1.50% in the fourth year, 2.00% in the fifth year, and 2.50% in the sixth year. Currently, there are just over two years left until the maturity date of the Su Bank Convertible Bonds.

Nearly 80% of the Convertible Bonds have not yet been converted into Stocks; therefore, purchasing Convertible Bonds for Shareholding enhancement by major shareholders may be a better option.

Industry consensus holds that when Convertible Bonds trigger forced redemption, banks often choose to redeem them early. If the Su Bank Convertible Bonds successfully trigger the conditional redemption clause, the Bank Of Suzhou is likely to exercise the early redemption rights and forcefully redeem the remaining unconverted Su Bank Convertible Bonds.

However, it is worth mentioning that Convertible Bonds can only effectively supplement core Tier 1 capital after conversion into stocks. Redeeming them under a low conversion ratio may not effectively alleviate the bank's core Tier 1 capital pressure. As of the latest disclosure, over 79% of the Su Bank Convertible Bonds had not yet been converted as of the end of last December.

In this regard, Zheng Jiawei pointed out that forced redemption under a low conversion ratio may have some adverse effects on the bank's own capital structure planning in the short term, as a large number of Convertible Bonds are redeemed without having converted into stocks, meaning the bank does not gain the expected supplementary core Tier 1 capital. However, in the long term, forced redemption can convey the bank's confidence in its financial situation and future development to the market, helping to enhance the bank's image in the market and creating better conditions for subsequent capital operations.

Currently, some Banks need to supplement their core capital, and there is also the reality of low conversion rates for Convertible Bonds. A few Banks can enhance the conversion rate by exercising the mandatory redemption mechanism." According to an industry Analyst, early redemption of Convertible Bonds can reduce future interest expenses for Banks and lower costs; against the backdrop of good stock performance, mandatory redemption of Convertible Bonds is also beneficial in encouraging some investors to expedite their conversion decisions and improve the conversion rate.

At the same time, based on the major shareholder Guofa Group's disclosure of a 0.3 billion yuan Shareholding plan, Zheng Jiawei further pointed out that if considering the conversion situation of Bank Of Suzhou's Convertible Bonds and the optimization of the Bank's capital structure, it may be more advantageous for Guofa Group to purchase Convertible Bonds for conversion: by purchasing Convertible Bonds for conversion, it can achieve Shareholding and promote the conversion of Convertible Bonds, achieving multiple benefits at once.

"As the difficulty of Banks exiting Convertible Bonds increases, the probability of debt-holding Shareholders converting their Bonds and introducing investment Institutions to increase their Convertible Bonds at a premium for conversion is rising." Zheshang Fixed Income Analyst Wang Minglu believes that, from past cases of Banks exiting Convertible Bonds, there is a strong willingness for Banks to promote conversion and mandatory redemption. Meanwhile, among the already Delisted Convertible Bonds, most actual controllers will convert their held Convertible Bonds to maintain their ownership ratio, thus reducing the scale of Convertible Bonds and supplementing the Bank's core capital.