Annual Report 2012

Financial Statements (PRC)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
for the year ended 31 December 2012
29 DEBENTURES PAYABLE
110
Annual Report 2012 CHINA PETROLEUM & CHEMICAL CORPORATION
The Group The Company
2012 2011 2012 2011
RMB millions RMB millions RMB millions RMB millions
Short-term corporate bonds (i) 30,000 — 30,000 —
Debentures payable:
– Corporate Bonds (ii) 60,000 78,500 60,000 78,500
– 2007 Convertible Bonds (iii) 10,956 10,415 10,956 10,415
– Bonds with Warrants (iv) 28,327 27,095 28,327 27,095
– 2011 Convertible Bonds (v) 22,566 22,627 22,566 22,627
Less: Current portion — (38,500) — (38,500)
121,849 100,137 121,849 100,137
Note:
(i) The Company issued 270-day corporate bonds of face value RMB 5 billion to corporate investors in the PRC debenture market on 25 July 2012 at par value of RMB
100. The effective yield of the 270-day corporate bonds is 3.11% per annum.
The Company issued 90-day corporate bonds of face value RMB 5 billion to corporate investors in the PRC debenture market on 25 October 2012 at par value of RMB
100. The effective yield of the 90-day corporate bonds is 3.70% per annum.
The Company issued 180-day corporate bonds of face value RMB 10 billion to corporate investors in the PRC debenture market on 8 November 2012 at par value of
RMB 100. The effective yield of the 180-day corporate bonds is 3.88% per annum.
The Company issued 270-day corporate bonds of face value RMB 10 billion to corporate investors in the PRC debenture market on 19 November 2012 at par value of
RMB 100. The effective yield of the 270-day corporate bonds is 3.90% per annum.
(ii) These corporate bonds are guaranteed by Sinopec Group Company and are carried at amortised cost.
(iii) On 24 April 2007, the Company issued zero coupon convertible bonds due 2014 with an aggregate principal amount of HKD 11.7 billion (the “2007 Convertible
Bonds”). The 2007 Convertible Bonds are convertible into shares of the Company from 4 June 2007 onwards at a price of HKD 10.76 per share, subject to adjustment
for subdivision or consolidation of shares, bonus issues, rights issues, capital distribution, change of control and other events, which have a dilutive effect on the
issued share capital of the Company (the “Conversion Option”). Unless previously redeemed, converted or purchased and cancelled, the 2007 Convertible Bonds will be
redeemed on the maturity date at 121.069% of the principal amount. The Company has an early redemption option at any time after 24 April 2011 (subject to certain
criteria) (the “Early Redemption Option”) and a cash settlement option when the holders exercise their conversion right (the “Cash Settlement Option”).
During the year ended 31 December 2011, the Company redeemed part of the 2007 Convertible Bonds upon certain holders’ request, with the principal amount of
HKD 39 million.
During the year ended 31 December 2012, the conversion price of the 2007 Convertible Bonds was adjusted to HKD 10.60 per share as the result of dividend
distribution.
At 31 December 2012, the carrying amounts of liability and derivative components, representing the Conversion Option, the Early Redemption Option and the Cash
Settlement Option, of the 2007 Convertible Bonds were RMB 10,842 million (2011: RMB 10,345 million) and RMB 114 million (2011: RMB 70 million), respectively.
No conversion of the 2007 Convertible Bonds occurred up to 31 December 2012.
At 31 December 2012 and 2011, the fair value of the derivative component of the 2007 Convertible Bonds was calculated using the Black-Scholes Model. The following
are the major inputs used in the Black-Scholes Model:
2012 2011
Stock price of H shares HKD 8.78 HKD 8.17
Conversion price HKD 10.60 HKD 10.76
Option adjusted spread 150 basis points 200 basis points
Average risk free rate 0.39% 0.72%
Average expected life 1.3 years 2.3 years
Any changes in the major inputs into the Black-Scholes Model will result in changes in the fair value of the derivative component. The change in the fair value of the
derivative component from 31 December 2011 to 31 December 2012 resulted in an unrealised loss from changes in fair value of RMB 43 million (2011: an unrealised
gain of RMB 259 million), which has been recorded as “gain/(loss) from changes in fair value” in the income statement for the year ended 31 December 2012.
The initial carrying amount of the liability component is the residual amount, which is the cash proceeds from issuance of debentures after deducting the allocated
issuance cost of the 2007 Convertible Bonds relating to the liability component and the fair value of the derivative component as at 24 April 2007. Interest expense is
calculated using the effective interest method by applying the effective interest rate of 4.19% to the adjusted liability component. If the aforesaid derivative component
has not been separated out and the entire 2007 Convertible Bonds is considered as the liability component, the effective interest rate would have been 3.03%.
(iv) On 26 February 2008, the Company issued convertible bonds with stock warrants due 2014 with an aggregate principal amount of RMB 30 billion in the PRC (the “Bonds
with Warrants”). The Bonds with Warrants, which bear a fixed interest rate of 0.80% per annum payable annually, were issued at par value of RMB 100. The Bonds
with Warrants were guaranteed by Sinopec Group Company.
The initial recognition of the liability component of the Bond with Warrants is measured as the present value of the future interest and principal payments, discounted
at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a conversion option or other derivative components.
Interest expense is calculated using the effective interest method by applying the effective interest rate of 5.40% to the liability component.