[CB Crisis] ① Warehouse Running Low Amid Redemption Demands... KOSDAQ Facing Aftershocks of CB

Issuing CBs When Liquidity Is Abundant
Repayment Demands Surge in Bear Market
20 Trillion Issued in 2020-21... Alternative Funding Expected to Be Difficult

[Asia Economy Reporter Hyungsoo Park] The number of KOSDAQ companies facing financial difficulties due to previously issued convertible bonds (CB) is increasing rapidly. These companies secured funds by issuing CBs during a period of abundant liquidity to use for investment and operating capital. However, as stock prices have recently fallen, investors who failed to convert their bonds into shares are demanding repayment, causing cash reserves to dry up. With stock prices declining and interest rates rising, securing alternative funding has become difficult, leading to a worsening liquidity crisis.

According to data compiled by Asia Economy on the 25th based on information from the Korea Securities Depository, the scale of mezzanine bonds such as CBs and bonds with warrants (BW) issued by domestic listed companies in 2020 and 2021 reached 20.1 trillion KRW. Considering that 4.4 trillion KRW worth was issued in 2019, just before the COVID-19 pandemic, this represents more than double the issuance amount over the past two years by utilizing abundant liquidity. Excluding the amounts converted into shares by investors or early redeemed by issuing companies before maturity, the outstanding balance of mezzanine bonds currently stands at 15.4 trillion KRW.

The problem is that most of these mezzanine bonds are approaching their early redemption periods sequentially. As the stock prices of listed companies have plummeted by half, investors who find it difficult to convert mezzanine bonds into shares are demanding early redemption (exercise of put options) from issuing companies. Most mezzanine bonds include put option clauses that allow investors to demand early redemption from the issuing company after a certain period if they fail to convert into shares.

KOSDAQ-listed Nexton Bio decided to repay 5 billion KRW of its '4th series CB' issued last November. Nexton Bio's stock price was above 8,000 KRW in November last year but has since fallen below 3,000 KRW. As of the end of the first quarter, Nexton Bio holds 24.8 billion KRW in cash equivalents, but the outstanding CB balance is 38 billion KRW, far exceeding its cash reserves. The conversion price of the 4th series CB has dropped from 7,700 KRW at issuance to 2,691 KRW. The number of shares issued upon conversion increased from 1.3 million to 3.72 million shares. If the stock price rebounds and investors demand conversion, the issue of a large overhang (potential sell orders) will also grow.

MFM Korea also recently decided to repay 5 billion KRW as bondholders exercised their early redemption rights. The conversion price of the 3rd series CB issued in January last year is 1,414 KRW, higher than the current stock price of 926 KRW. As of the end of the first quarter, the company holds only 1.9 billion KRW in cash equivalents. Its debt ratio rose to 264%, up 40 percentage points from 224% at the end of last year. Several listed companies, including Vivoson Healthcare, Medicox, KH Electronics, AT Semicon, SG, and GTG Wellness, are acquiring bonds before maturity in response to early redemption demands. Most of these are CBs issued in 2020 and 2021. Among KOSDAQ-listed companies, 8 out of 10 have seen their stock prices fall compared to the end of last year. More than 600 companies have experienced stock price drops exceeding 30%.

An investment banking (IB) industry insider said, "Even if companies raised funds through mezzanine bonds during times of abundant liquidity to expand production capacity or for operating capital, it is not easy to immediately generate cash flow. With rising raw material prices and exchange rates worsening the business environment, and poor earnings performance, the number of listed companies struggling to repay debts has increased. The lending standards of financial institutions have also tightened, making it inevitable that many listed companies face difficulties due to deteriorating liquidity."

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