CJ CGV Large-Scale Paid-in Capital Increase... Negative Impact on Stock Price, Positive for Credit Rating

Debt Ratio Expected to Improve Sharply from 912% at End of March to 258.9%
CJ OliveNetworks Included in Consolidation, Contributing to Stabilization of Profit Structure

The stock price of CJ CGV has continued to show a sluggish trend following the announcement of a large-scale rights offering. Amid this, major credit rating agencies have analyzed that the rights offering could positively impact the company's credit rating by improving its financial structure and stabilizing its revenue structure.

Korea Ratings (KR) forecasted that if CJ CGV's contribution in kind and payment for the rights offering proceed as planned, the financial structure will significantly improve.

Earlier, on the 20th of last month, CJ CGV announced plans for a rights offering worth 570 billion KRW and a third-party allotment rights offering with CJ as the allottee (a contribution in kind of 100% of CJ OliveNetworks shares held by CJ). According to the announcement, the value of CJ OliveNetworks shares is approximately 450 billion KRW, and out of the 570 billion KRW rights offering, 60 billion KRW is expected to be contributed by the largest shareholder, CJ.

KR anticipated that if CJ's plan proceeds as scheduled, CJ CGV's debt ratio will dramatically improve from 912% at the end of March 2023 to 258.9%, and the reliance on borrowings will ease from 76.4% to 57.1%. A KR official stated, "If the funds raised through the rights offering are used to repay hybrid bonds, the debt ratio may rise again, but compared to before the capital increase, the financial structure will improve, and the financial cost burden will also be significantly reduced."

They also analyzed that the inclusion of CJ OliveNetworks in the consolidated group will positively contribute to stabilizing the revenue structure. The inclusion of CJ OliveNetworks is expected to increase EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), improving the adjusted net debt/EBITDA ratio from 12.0 times to around 8.2 times. KR stated, "Since 2022, the number of moviegoers has increased, showing a recovery trend in performance. Once the contribution in kind and rights offering process is completed and the recovery in the movie screening segment due to increased domestic and international movie demand becomes visible to some extent, we plan to reflect this in the credit rating."

Meanwhile, KR analyzed that the impact of this rights offering and contribution in kind on CJ's credit rating is limited. CJ will experience a cash outflow of 60 billion KRW due to the rights offering to CGV, and dividend income is expected to decrease by about 10 billion KRW due to the contribution in kind of CJ OliveNetworks. KR added, "Since the immediate cash outflow scale and expected dividend reduction are not large, the impact on credit rating will not be significant."

NICE Investors Service (NICE) also viewed CJ CGV's capital increase plan as positive for alleviating financial burdens. NICE assessed, "From a business perspective, upon completion of CJ's contribution in kind, the company is expected to secure a stable revenue source through CJ OliveNetworks."

Currently, CJ CGV's own cash-generating ability has declined due to COVID-19, and it has been covering its funding shortfall and repaying borrowings through external financing, including hybrid bonds, increasing its financial burden. However, NICE predicted that if this large-scale capital increase and rights offering proceed as planned, financial stability indicators will improve significantly through repayment of borrowings and hybrid bonds. They analyzed that the actual financial burden will also be alleviated.

NICE stated, "The capital increase through the rights offering and contribution in kind, along with repayment of borrowings and hybrid bonds, improves the company's financial structure and is expected to secure stable revenue sources, which is positive for alleviating financial burdens. However, although the business environment is expected to improve with the transition to the COVID-19 endemic phase, leading to a recovery in attendance demand and operating performance, it is necessary to verify the level and sustainability of the company's profit-generating capacity," they added.

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