The Market Mechanism to Prevent the Debt Risk of the Local Government-Backed Investment Companies: In View of Contingent Convertible Bonds

Abstract

In view of contingent convertible bonds, this paper studies the effect of market on the prevention of the debt risk of the local government-backed investment companies. The results are presented as follows: contingent convertible bonds can timely optimize the capital structure of the local government-backed investment companies in the debt crisis, increase the tolerance for the leverage; the mandatory conversion of debt to stock can prevent the debt risk contagion, relief the pressure on the bailouts from the government; risk pricing and exchange in markets can enhance the capabilities of the markets to absorb the loss from the debt risk of the local government-backed investment companies. In a word, market can prevent the debt risk of the local government-backed investment companies by the application of the contingent convertible bonds.