Rhyme Asset Management, Will the Exercise of Convertible Bonds Accelerate?

Exercise conversion rights even if the current stock price is higher than the conversion price
Secure cash by selling after conversion rather than waiting for maturity repayment
Convertible bonds with adjustable conversion price up to face value... Sharp increase in convertible shares

[Asia Economy Reporter Hyungsoo Park] Lime Asset Management, which suspended redemptions last year, has recently been liquidating its holdings by selling shares of KOSDAQ-listed companies one after another.

According to the Financial Supervisory Service on the 15th, Lime Asset Management sold all of its 9.86% stake (6,145,123 shares) in Gemvax Geo on the market between the 20th of last month and the 6th of this month. The average selling price per share was 1,450 KRW, securing a total of 8.38158 billion KRW. This recorded a return of over 70% compared to the conversion price of 822 KRW.

Lime Asset Management is also steadily selling its shares of Shufex BNP on the market. Between the 19th of last month and the 9th of this month, it sold 3 million shares at an average price of 301 KRW per share, converting them into 900 million KRW in cash. Even if converted at face value, it appears to have sold at a loss of about 40%.

Previously, Lime Asset Management acquired convertible bonds issued by Shufex BNP in May 2018. At that time, the conversion price was 1,453 KRW, but as the stock price declined, the conversion price was lowered to the face value. However, a clause prevented the conversion price from being lowered below the face value of the stock. The stock price of Shufex BNP surged to 2,425 KRW on May 18, 2018, due to large-scale fundraising. However, the stock price subsequently declined and has been trading below face value since October last year.

Lime Asset Management is also accelerating the exercise of conversion rights on the convertible bonds it holds. When Lime Asset Management declared suspension of redemptions last October, it explained that for mezzanine funds, quickly disposing of invested convertible bonds could result in significant losses, and that it would strive to recover safely at a reasonable price. It also emphasized that many of the invested bonds were secured with collateral, ensuring principal recovery even in emergencies.

However, Lime Asset Management recently exercised conversion rights on listed companies whose stock prices are below the conversion price. It appears to have judged that converting to shares would reduce losses compared to redeeming the bonds. On the 2nd of last month, it exercised conversion rights to acquire 21,575,984 shares (14.55% stake) of Dongyang Networks. The conversion price was 533 KRW, which is higher than the previous day's closing price of 506 KRW. It also exercised rights on convertible bonds of Esmo Materials. The conversion price was 3,690 KRW, exceeding the stock price at the time of conversion. The converted volume reached 5.15 million shares, and the estimated valuation loss is at least 8 billion KRW. Lime Asset Management extended the maturity date by refinancing the remaining convertible bond amount after conversion requests.

The financial investment industry expressed concerns that the vicious cycle between Lime Asset Management and the invested listed companies could further increase the scale of losses. With the deadline for submitting audit reports in March this year approaching, variables have increased. An industry insider pointed out, "Supervisory authorities are watching the listed companies invested by Lime Asset Management, which has increased the burden on external auditors."

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