[At a Crossroads for Listed Companies] Why BK Tops Converts CBs at the Barely Passing Conversion Price Amid Capital Erosion

[Asia Economy Reporter Jang Hyowon] The convertible bonds (CB) of BK Tops, a KOSPI-listed company, will be converted into shares. Although the volume exceeds 9% of the total issued shares and it is difficult to expect capital gains at the current stock price, attention is focused on why investors chose to convert to shares.

According to the Financial Supervisory Service's electronic disclosure on the 11th, BK Tops announced that the entire 3 billion KRW worth of the 8th series CB issued on April 7 last year has been fully converted. This CB was initially decided to be issued at 5 billion KRW in February last year but was reduced to 3 billion KRW after two amendments. Of this, 2.9 billion KRW was used to repay debt.

The conversion price of the 8th series CB is 2,072 KRW per share. The initial conversion price at issuance was 12,304 KRW, but it was adjusted nine times due to BK Tops' stock price decline. This represents an 83% decrease compared to the initial conversion price. Since the conversion price adjustment limit (refixing) for the 8th series CB is the face value of 500 KRW, the conversion price could be significantly lowered.

However, 2,072 KRW per share is not a price that guarantees profits from the perspective of CB investors. BK Tops' stock price has been on a downward trend recently. On this day, it dropped to as low as 2,130 KRW during trading, only 2.8% higher than the conversion price. If the stock price falls further by the scheduled listing date of the converted shares on the 21st, CB investors could incur losses.

Additionally, the volume to be converted this time is 1,447,876 shares, accounting for 9.33% of the total issued shares. Arithmetically, if the corporate value remains unchanged and only the number of shares increases, the price per share will fall accordingly. This is why the current stock price level is not stable for CB investors.

Nevertheless, CB investors chose to convert to shares instead of receiving principal and interest repayments. The 8th series CB has a nominal interest rate of 0%, but the maturity interest rate is 3%. Investors could have exercised early redemption (put option) from the 7th, with an early redemption rate of 103.0560%. If they had requested redemption, they could have received about 3.09 billion KRW.

The reason for converting to shares despite the risk of principal loss is analyzed to be due to BK Tops' lack of funds for repayment.

Last year, BK Tops reported a consolidated operating loss of 10.5 billion KRW and a net loss of 34.3 billion KRW, according to a preliminary disclosure. As a result, total equity fell to 4.9 billion KRW, less than the capital stock of 7.5 billion KRW, leading to a state of capital erosion. The capital erosion rate is 35.7%. The debt ratio also exceeded 2000%.

Cash equivalents were only 900 million KRW as of the end of the third quarter last year. Operating and investing cash flows showed negative figures, requiring cash to be raised through financing activities. However, only a small paid-in capital increase of 1 billion KRW was successfully completed in February, and the 18 billion KRW paid-in capital increase being pursued since early this year has been continuously delayed in payment dates.

Meanwhile, BK Tops has applied for and received an exemption from sanctions for delayed submission from the Financial Supervisory Service, citing difficulties in collecting audit materials due to COVID-19. The company plans to submit the audit report by the 16th of next month.

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