Convertible Bond Conversion Price Downward Adjustment Matrix

[Asia Economy Reporter Eunmo Koo] This year, as the stock market experienced fluctuations due to the novel coronavirus infection (COVID-19), the number of companies lowering the conversion price of convertible bonds (CB) has increased.

According to the Financial Supervisory Service's electronic disclosure system (DART) on the 17th, there have been 620 disclosures of CB conversion price reductions (refixing) in the KOSDAQ market this year up to the previous day. This represents an 18.0% (95 cases) increase compared to the same period last year (525 cases). During the same period, disclosures in the KOSPI market (including new stock subscription rights exercise price, exchange price, and conversion) increased by 22.0%, from 123 to 150 cases.

Conversion price adjustment is a kind of after-service where the issuing company lowers the price at which one CB can be converted into shares when the company's stock price continuously declines, thereby expanding investors' opportunities to convert bonds into stocks. If the stock price remains consistently below the conversion price, investors may consider early redemption, and from the issuer's perspective, to avoid cash redemption demands, they have no choice but to lower the conversion price. The frequency and limits of conversion price adjustments can be determined by the company's articles of incorporation or by a special resolution of the shareholders' meeting.

The increase in conversion price reductions this year is interpreted as a result of severe fluctuations in the stock market due to COVID-19. Although the market index has been rising since the market bottomed out at the end of March following the COVID-19 pandemic, stock prices have declined mainly among companies that increased CB issuance in the past one to two years, leading to demand for conversion price reductions.

There has also been an increase in cases where investors request early redemption without exercising conversion rights before CB maturity. This year, there have been 344 disclosures of bond acquisitions before maturity after CB issuance, a 59.2% (128 cases) increase compared to 216 cases in the same period last year. Many CBs include a put option allowing investors to request the company to repurchase the CBs, i.e., early redemption. An increase in put option exercises can be interpreted as a growing judgment that the stock price is stagnant, making it difficult to expect profits even if converted to shares, or that holding until maturity is too risky. A Korea Exchange official explained, "From the bondholder's perspective, exercising conversion rights does not seem particularly profitable, so they exercise the put option to have the company repurchase the bonds."

An increase in conversion price reductions raises concerns about future shareholder value dilution. Since the number of shares issued increases when CBs are converted into stocks, the value per share inevitably decreases. A lowered conversion price means that the volume of convertible shares waiting to be converted has increased, which can negatively affect the stock price. Therefore, conversion prices cannot be adjusted indefinitely and are generally set around 70% of the initial conversion price.

This content was produced with the assistance of AI translation services.