[At a Crossroads for Listed Companies] Korea SE, the Reason for Aztec's Bond-to-Equity Conversion After '4 Years of Deficits'

[Asia Economy Reporter Jang Hyowon] Korea SE, a KOSDAQ-listed company, is converting the money lent to its subsidiary ‘Aztec’ into equity. Aztec has never turned a profit since being acquired by Korea SE in 2017. It is like pouring water into a leaking jar. The company expects Aztec to turn profitable once LED investments in China resume.

Aztec Converts 5.1 Billion KRW Bonds into Equity

According to the Financial Supervisory Service’s electronic disclosure on the 19th, Korea SE invested 5.1 billion KRW in a third-party allotment capital increase of its subsidiary Aztec the day before. Korea SE previously held a 50.49% stake in Aztec, which will increase to 87.53% after this capital increase.

As of the end of Q3 this year, Aztec is in a state of capital erosion with assets of 2.1 billion KRW and liabilities of 6 billion KRW. Most of the liabilities, 5.1 billion KRW, are corporate bonds held by Korea SE. Korea SE has already impaired 4.3 billion KRW of this amount, and with this capital increase, it will convert all corporate bonds into equity. As a result, Aztec’s 5.1 billion KRW debt will be converted into capital, expected to lift it out of capital erosion.

Aztec is a sapphire ingot manufacturer primarily engaged in supplying materials for light-emitting diodes (LEDs). After entering rehabilitation proceedings in 2016 as a subsidiary of Dongkuk Steel, Korea SE acquired a 50.49% stake in early 2017 for 870 million KRW.

Korea SE also took on 1.7 billion KRW of Aztec’s debt at that time. In total, Aztec was incorporated as a subsidiary for 2.57 billion KRW.

Since then, Korea SE has repeatedly purchased Aztec’s corporate bonds, lending an additional 5.1 billion KRW, but Aztec ultimately failed to repay the debt due to continuous losses and lack of funds.

When Korea SE first acquired Aztec in 2017, Aztec recorded sales of 3.8 billion KRW and an operating loss of 1.6 billion KRW. Sales dropped to 2.7 billion KRW in 2018 and further plummeted to 1.5 billion KRW in 2019. Meanwhile, net losses expanded, reaching 7.5 billion KRW last year.

Korea SE, which has been covering these growing losses, is not in a particularly strong financial position either. Since 2016, Korea SE’s sales have been declining annually. Last year, its standalone sales were 10.8 billion KRW, down 25.9% from 2016. Operating losses also amounted to 1.4 billion KRW.

Korea SE produces and sells permanent anchors, tie cables, caisson hangers, and bridge cables, and operates in PAP retaining wall construction and bridge construction. Sales have gradually decreased due to the government’s reduction of SOC projects.

A Korea SE official explained, “When we acquired Aztec, business prospects were good with talks of equipment exports to China, but COVID-19 caused setbacks. We believe that once the market recovers, Aztec can turn profitable.”

CEO Nam Hong-gi Joins In... Risks Remain with Korea SE

However, even if Aztec overcomes its slump and turns profitable, it is unlikely that Korea SE will fully enjoy the benefits. When Korea SE first acquired Aztec, CEO Nam Hong-gi, President Nam Kyung-gi, and others personally purchased shares.

At the time Korea SE acquired 50.49% of Aztec’s shares in 2017, the remaining 28.71% was acquired by CEO Nam Hong-gi, President Nam Kyung-gi, Nam Se-gi, and Nam Hyung-seok. The total price for these shares was about 490 million KRW.

Nam and others purchased Aztec shares at face value cheaply, while Korea SE fully covered operating funds. If Aztec had performed well, the profits would have been shared by Nam and others. However, despite four consecutive years of losses, all losses have been borne by Korea SE, which provided the operating funds. This structure allows Nam and others to gain profits without bearing risks.

Regarding this, Korea SE stated, “At the time of acquisition, Nam and others participated in the shares believing Aztec would do well. Also, from the company’s perspective, it was for risk diversification.”

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