Yeocheon NCC Demand Forecast Failure...FSC's Excessive Approval of Securities Registration Under Scrutiny

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] Yeocheon NCC, which experienced 8 casualties in a recent factory explosion accident at Yeosu National Industrial Complex, suffered a complete failure in its corporate bond demand forecast. In this process, controversy arose over Yeocheon NCC's insistence on proceeding with the demand forecast without considering investors' concerns about poor market participation and the financial authorities' forced acceptance of the debt securities registration statement. It is also pointed out that the burden on the seven securities firms, including the lead underwriter and the underwriting group that undertook the total underwriting contract in this corporate bond issuance, has increased.

According to the investment banking (IB) industry on the 15th, Yeocheon NCC attempted to raise a total of 200 billion KRW, including 120 billion KRW for 3-year bonds and 80 billion KRW for 5-year bonds, but received no subscriptions at all, resulting in a complete failure to sell. Yeocheon NCC proposed an interest rate band of '-30~+30bp' for the 3-year bonds and '-30~+50bp' for the 5-year bonds, but was thoroughly shunned by institutional investors. Originally, Yeocheon NCC planned to use the corporate bond issuance funds to refinance 100 billion KRW of bonds maturing in August this year and to repay 40 billion KRW of facility funds borrowed from KDB Industrial Bank.

The failure of the demand forecast was somewhat predictable. On the 11th, an explosion accident occurred at the Yeosu plant's 3rd factory of Yeocheon NCC, resulting in 4 workers dead and 4 injured. Less than a week after the accident, while investigations were underway, concerns arose about a decrease in demand from institutional investors who emphasize ESG (Environmental, Social, and Governance). Industrial safety is a significant factor in ESG evaluations, and with the enforcement of the Serious Accident Punishment Act, companies responsible for fatal accidents face increased risks of operational disruptions. The Ministry of Labor and the police conducted a search and seizure of Yeocheon NCC's onsite office, and the 3rd factory where the accident occurred has been ordered to suspend operations. Yeocheon NCC stated that since this fundraising was already planned in their business plan, they proceeded with the corporate bond issuance as scheduled.

The financial authorities' forced acceptance of the debt securities registration statement also came under scrutiny. The debt securities registration statement of Yeocheon NCC was disclosed on the afternoon of the 11th, the day of the accident, leading to criticism that the business risks related to the accident were not properly reflected. In the market, there is controversy that the Financial Supervisory Service hastily activated the effectiveness of the securities registration statement without observing the accident's developments for at least 1 to 2 weeks. It is argued that the registration statement should have been accepted at a point when the loss portion from provisions and other accident-related damages could be reasonably anticipated.

The Financial Supervisory Service maintains that since the registration statement included the fact of the Yeosu plant accident, there was no problem in accepting the registration. A FSS official said, "Although it cannot be said that there is no risk to investors, the explosion accident was reported in the news and was also stated in the debt securities document, so we judged that blocking the company's fundraising intention was inappropriate and accepted the debt securities registration statement."

Due to this failure, the burden on securities firms that proceeded with the total underwriting contract for the corporate bonds has increased. Although Yeocheon NCC's demand forecast resulted in a complete failure, the securities firms, including the lead underwriter, must bear the unsold corporate bonds due to the total underwriting system. An IB industry official said, "It seems that Yeocheon NCC's failure to properly communicate with the market after the explosion accident and then proceed with the corporate bond issuance was the cause of this demand forecast failure," adding, "Because of the total underwriting contract, all securities firms will have to bear the underwriting burden."

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