[Funding] Hanchang, the Difficult Path to Improving Financial Structure

Rights Offering of 0.97 New Shares per 1 Old Share in Europe
50-70% Subscription by Major Shareholders
20% Fee Applies if Unsubscribed Shares Occur After Public Offering

[Asia Economy Reporter Hyungsoo Park] Hanchang has launched a rights offering to improve its financial structure. This move is seen as a response to a sharp increase in financial costs due to borrowings rising by more than 20 billion KRW this year.

According to the Financial Supervisory Service's electronic disclosure system on the 19th, Hanchang will raise funds through a rights offering allocating 0.97 new shares per existing share, followed by a general public offering of forfeited shares. The issue price per share is 1,025 KRW, totaling approximately 32.8 billion KRW. Of the funds raised, 26.6 billion KRW will be used to repay borrowings, and 5.3 billion KRW will be spent on purchasing fire cylinders and nitrogen gas.

As of the end of Q1 this year, consolidated liabilities stood at 84.7 billion KRW, with a debt ratio of 418.5%. The debt ratio increased from 153.6% in 2017 to 225.7% in 2018 and 243.5% in 2019. In Q1, Hanchang showed negative operating cash flow due to decreased sales and recorded a net loss of 6.9 billion KRW. Despite poor performance, Hanchang continued investment activities such as acquiring stocks of other companies and tangible assets. To cover cash outflows from operating and investing activities, it issued convertible bonds twice, raising 20 billion KRW.

Hanchang plans to prioritize repayment of borrowings with higher interest rates among its short- and long-term debts. If funds are raised as planned, it expects to repay more than 70% of its borrowings. If the general public offering of forfeited shares fails to raise the planned amount, the lead underwriter, Eugene Investment & Securities, and the underwriting group member, Hanyang Securities, will purchase the remaining shares. Hanchang will pay a forfeiture fee equivalent to 20.0% of the amount for the remaining shares. The amount raised through the rights offering will decrease by the forfeiture fee, which is why the repayment priority is set.

Hanchang is also pushing forward with the capital increase considering that investors holding convertible bonds issued in January can request early redemption instead of converting to common shares. Given that Hanchang’s stock price has halved since the convertible bonds were issued in January, the likelihood of conversion is low.

In this urgent fundraising situation, Hanchang’s largest shareholder, HJF&I, plans to subscribe to about 50-70% of the new shares allocated. HJF&I holds 3.0% (1,043,860 shares) of Hanchang’s shares. Including shares held by related parties, the total ownership is 6.6%. If only 50% of the subscription is participated in, the ownership will drop to 5.13%. Although there is concern about weakening control, the 'golden parachute' clause in the articles of incorporation makes a sudden change in management unlikely. According to Article 40 of Hanchang’s articles of incorporation, if the CEO or directors lose their jobs due to a hostile takeover (M&A) during their term, they are entitled to receive 10 billion KRW and 5 billion KRW respectively, in addition to regular severance pay.

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