Isu Abxis Initiates Early Redemption of Private CB with Public CB

Issued 8th CB to Raise 50 Billion KRW for Debt Repayment
Increased Likelihood of Early Redemption of 7th CB Issued 2 Years Ago
Less Concern Over Shareholder Value Dilution Compared to New Shares Issued in Capital Increase

Isu Abxis is issuing convertible bonds (CB) through a public offering to raise funds for repaying the CB issued via a private placement two years ago. The conversion price has decreased compared to two years ago, and the interest rate has increased.

According to the Financial Supervisory Service's electronic disclosure system on the 8th, Isu Abxis is raising 50 billion KRW by issuing the "8th CB" through a shareholder preferential public offering. Shareholders receive the right to preferentially subscribe to CB worth 1,445 KRW per existing share. If the subscription amount is less than planned, the joint lead underwriters, Korea Investment & Securities and NH Investment & Securities, will underwrite the remaining amount. Although it is a bond, interest will not be paid.

Isu Abxis will use all the funds raised from issuing the CB to repay debt. In June 2021, Isu Abxis issued the "7th CB" to domestic institutional investors to raise 80 billion KRW for operating funds. The conversion price was 16,150 KRW, and if Isu Abxis’s stock price fell, it was to be adjusted down to 11,350 KRW.

The raised funds have been used for researching and developing bio innovative new drugs under development and discovering and developing new bio innovative new drugs. The company has obtained approval from the Korean Ministry of Food and Drug Safety to sell Clotinab (antithrombotic antibody therapy), Absertin (Gaucher disease rare disease treatment), and Pavagall (Fabry disease rare disease treatment). It is also researching and developing treatments such as the intractable cancer antibody drug (ISU104), Alzheimer’s-type dementia treatment (ISU203), and hemophilia B new drug (ISU304).

Institutions that invested in the 7th CB expected to earn investment returns from the rise in Isu Abxis’s stock price, even if they gave up interest income. However, contrary to expectations, Isu Abxis’s stock price fell more than 60% compared to the CB subscription date. Although conversion price adjustments continued, the stock price fell below the minimum threshold. On the 12th of last month, when the board meeting that resolved the CB issuance was held, Isu Abxis’s stock price closed at 7,110 KRW. With the stock price hovering around 60% of the conversion price, the Isu Abxis board judged that it must prepare for early redemption requests.

It is difficult to respond with only the funds currently held. Isu Abxis has been using the funds raised from the CB issued two years ago for research and development. Cash and cash equivalents decreased from 89.8 billion KRW at the end of the first half of 2021 to 10.9 billion KRW at the end of the first half of this year. During the same period, short-term financial products increased from 4 billion KRW to 31.5 billion KRW. Although it holds more than 40 billion KRW in funds, it is difficult to use all of it to repay the 7th CB early. Continuous research and development expenses have resulted in ongoing deficits.

Sales have steadily increased over three years: 25.6 billion KRW in 2020, 28 billion KRW in 2021, and 41.2 billion KRW in 2022. However, this is insufficient to cover ordinary development costs for new pipelines and operating expenses. The company recorded an operating loss of 16 billion KRW last year and a deficit of 2.5 billion KRW in the first half of this year. As of the end of the first half of this year, the total debt ratio is 25.2%, with debt-to-equity and current ratios at 132.5% and 100.9%, respectively.

The maturity of the 7th CB is June 30, 2026, but early redemption can be requested until the 30th of this month. CBs for which the redemption right is exercised must be repaid by January 2 of next year.

The board chose to issue CBs among various fundraising methods, including shareholder allocation rights offerings. To raise funds through a public offering, a securities registration statement must be submitted and shareholders persuaded. Issuing CBs is advantageous for persuading shareholders because interest can be offered and the conversion price lowered.

A financial investment industry official explained, "Issuing CBs can be more favorable to shareholders than a rights offering issuing new shares," adding, "For a rights offering, the new share issuance price must be fixed, but the CB conversion price can be adjusted downward by 30% if the stock price falls." Furthermore, "Depending on stock price trends, investors can demand repayment even if they do not convert to common stock," they added.

Comparing the issuance conditions of the 7th and 8th CBs, the terms have become more favorable to investors. Two years ago, no interest was paid, but the 8th CB offers a maturity guaranteed yield of 5%. The initial conversion price has also dropped from 16,150 KRW to 7,000 KRW. The scheduled conversion price is 7,000 KRW, and the final conversion price will be confirmed on the 11th of next month. The conversion price may change depending on future stock price trends. The payment date for the investment funds to acquire the 8th CB is the 22nd of next month.

A company official explained, "The decision to issue shareholder preferential public convertible bonds was made to minimize stock price volatility risk" and "to share the profits from growth with existing shareholders."

The largest shareholder, Isu Chemical, participated in Isu Abxis’s third-party allocation rights offering on the 23rd, investing 10 billion KRW. The new share issuance price was 7,000 KRW, and 1.43 million shares were acquired. The largest shareholder’s stake increased from 33.63% to 36.37%.

If Isu Abxis succeeds in raising funds by issuing CBs, the dilemma of listed company boards needing capital is expected to deepen. Quite a few listed companies have already resolved shareholder allocation rights offerings to respond to early redemption of CBs issued two years ago. There is significant concern about shareholder value dilution from new share issuance. While issuing CBs leaves repayment burdens, it may reduce shareholder value dilution concerns compared to issuing new shares.

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