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.

According to industry experts, the current performance of Bank Of Chengdu's stock is good. Redeeming Convertible Bonds early can reduce the bank's future interest expenses, and may also encourage some Convertible Bond investors to accelerate their conversion decisions. Data shows that as of the close on December 18, Bank Of Chengdu's stock is priced at 16.32 yuan/share, with a decrease of 0.91% on that day.

However, for Convertible Bond investors, 'if forced to redeem, they may face significant investment losses.' Industry insiders suggest that investors can 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 a timely manner to enjoy the benefits of price increase; conversely, they can hurry to sell at suitable prices in the secondary market to profit.

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 (with a total issue amount of 8 billion yuan) listed on the Shanghai Stock Exchange, referred to as 'Bank Of Chengdu Convertible Bonds'. At the same time, the 'Bank Of Chengdu Convertible Bonds' stipulated conditional redemption clauses, with triggering conditions including that the bank's stock closing price must not be lower than 130% of the current conversion price for at least 15 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 Chengyin Convertible Bonds is a decision made by Bank Of Chengdu based on the terms of the Convertible Bonds and its own operational strategy," said Zheng Jiawei, chief Analyst of Yongxing Securities’ Fixed Income sector, to reporters from the Financial Association. From the terms, when Chengyin Convertible Bonds were issued, redemption terms were already set, and currently, its stock price has met the corresponding trigger conditions; from the perspective of Bank Of Chengdu, its current stock price is performing well, and redeeming the Convertible Bonds can reduce future interest expenses.

However, for investors holding the Convertible Bonds, in the event that Bank Of Chengdu decides to exercise its early redemption rights, the only options available for the held Convertible Bonds, other than continuing to trade in the secondary market within the prescribed time limit or converting stocks at a price of 12.23 yuan per share, would be to be forced redeemed at a face value of 100 yuan per bond plus the current accrued interest. "If forced redemption occurs, there may be significant investment losses," reminded Bank Of Chengdu.

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 stated that the funds raised from the issuance of Convertible Bonds, after deducting issuance expenses, will be used entirely to support the company's future business development, and will be used to supplement core Tier 1 capital in accordance with relevant regulatory requirements after the Convertible Bond holders convert.

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.