The Key To Restart The Business Cycle Is To Grasp The Key.

The European and American markets, which have experienced the impact of the subprime crisis, are actually reflecting whether they can solve the problem of mortgage default at the time.

From 2008 to 2013, Adair Turner, the chairman of the financial services authority, said in a new book "debt and devil" that the large amount of subprime loans was the main culprit of the last round of the crisis cycle, but the harsh and unrestructured terms of the underlying assets in the multi tier securitisation restricted the foreclosure space of the lender.

In our familiar stock market, in the eyes of Turner, the subprime lenders are actually using leveraged stock investors.

The package of securitized loan contracts prohibits holders from liquidated in a sharp fall. The final result is that a great deal of social wealth has been destroyed, and the consumption expenditure of residents has been shrinking, and the economy has entered a period of seven or eight years of depression.

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From the perspective of order, debt is actually a priority capital invested in a company, and capital stock is a kind of inferior fund.

The modern enterprise has evolved a complex financing structure with stock debt combination. The fundamental reason is that the risk preference of market funds is different.

Those with small risk preference often invest in the priority share of fixed income, such as loans and bonds; and those with high risk preference tend to have larger share of the investment income fluctuation and become shareholders of the company.

Generally speaking, the risk of the company's financing structure is directly affected by the fluctuation of its industry or macroeconomic cycle.

In short, if profitable

A large amount of borrowed debt is cost-effective.

Because the cost of priority funds is fixed, enterprises only need to pay a small portion of profits to priority investors, and most of the profits can be retained as shareholders.

This is the same as the two grade stock market that we are familiar with. If we grasp the opportunity and dare to leverage in the early stage of the bull market, we usually get a good return on investment.

But the problem is,

Like the stock market, it is not always a bull market.

If the helm of the enterprise can not detect the risk of the economic cycle in time, then the favorable financing structure in the upstream cycle will become a hard liquor to swallow.

Enterprise bankruptcy - frankly speaking, it is the total loss of inferior funds, and whether priority funds can be saved depends on the ratio of bankruptcy liquidation and recovery.

If investors do not want companies to go bankrupt, debt restructuring is the most common solution.

The so-called debt restructuring is actually all investors sitting down to renegotiate, giving up principal or pro rata return on investment in proportion, in exchange for the best rate of return on investment as a whole.

From this perspective, debt to equity swap is actually the most thorough way of debt restructuring.

Because this means that the original priority investor should not only give up all the investment income he deserved, but also shift the principal from priority to the inferior level, so as to take risks for the later priority investors.

This restructuring is only effective in one case, that is, the economic or industrial cycle lingers at the bottom for a long time, and is about to move to the next upward cycle.

Obviously, if the cycle of China's economic consolidation is L in the next few years, the large debt stock will be ineffective.

Excess capacity will restrict the profit margin of the company after restructuring. Not only will the funds pferred from the priority to the poor can not guarantee the return on investment, will it even be uncertain whether the priority funds that follow up will gain profits?

But this does not mean that there is no room for debt restructuring.

In fact, the replacement of several local government financing platform bonds launched last year is essentially a debt restructuring.

As a creditor, banks have abandoned higher yielding loan assets and instead have held lower yielding bond assets.

By restructuring, the government's financial resources were recovered, and there was more room for new investment to drive the economy out of the trough.