Even a 3 Trillion Won Company Stumbles on 'Treasury Share EB' News... Retail Investors Disappointed Over Cancellation Hopes

KCC Announces 430 Billion Won EB Issuance Backed by Treasury Shares
Record-High Earnings Forecasts and Upgraded Target Prices Offer No Defense
51 Treasury Share EB Issuances This Year?Nearly Five Times Last Year’s Total

As some companies that have issued exchangeable bonds (EB) by disposing of their treasury shares are experiencing sharp stock price declines, investor anxiety is mounting. Although these companies took preemptive measures out of concern for potential threats to management rights due to the mandatory cancellation of treasury shares, it is the shareholders who are bearing the brunt of the resulting losses.

According to the Korea Exchange on September 25, KCC closed at 368,000 won the previous day, plunging by 11.75%. At one point during the session, the stock dropped by more than 17%. This is the largest single-day decline since February 15, 2022, when an earnings shock wiped out approximately 700 billion won in market capitalization (-21.04%) in a single day.

Company Once Forecast to Post Record Results, Plunges Overnight

The company’s announcement of an EB issuance was identified as the main cause of the stock price crash. KCC decided to issue EBs using 9.9% of its treasury shares (worth about 430 billion won) out of the 17.2% it holds, leading to a wave of sell-offs from investors who had been expecting a cancellation of treasury shares. The company announced plans to cancel another 3.9% of its treasury shares and contribute 3.4% to the in-house employee welfare fund, but this failed to meet shareholder expectations.

KCC is not the only company to face backlash over an EB issuance announcement. On September 3, Kakao Pay’s second-largest shareholder, Chinese fintech company Alipay, announced plans to issue EBs based on its 8.47% stake, worth about 630 billion won, causing Kakao Pay’s stock price to drop by around 10%. On June 30, when Taekwang Industrial decided to issue EBs backed by all of its treasury shares (24.4%), worth 320 billion won, its stock price plunged by 11.24%, resulting in the loss of its status as an “emperor stock” (stocks priced at 1 million won or more).

An EB is a bond that gives the holder the right to exchange it for shares of another company or the issuing company’s own shares. Companies can raise funds at lower interest rates than with regular corporate bonds, while investors receive regular interest payments and can seek additional gains by exercising the exchange right if the underlying stock price rises.

The problem is that when EBs are converted into shares, the ownership percentage of existing shareholders can be diluted. What’s more, prior to this EB issuance announcement, KCC had been buoyed by a surprise second-quarter performance and a recovery in the silicon industry, leading to rosy forecasts and further deepening shareholders’ sense of helplessness. In fact, Yoon Jaesung, a researcher at Hana Securities, recently raised KCC’s target price from 440,000 won to 520,000 won, projecting a record-high operating profit of 522.7 billion won for the year, up 11% from the previous year.

Growing Number of Treasury Share EB Issuances... Criticism of “Loophole” to Avoid Cancellation

As the mandatory cancellation of treasury shares has emerged as a key issue in the third amendment to the Commercial Act, more listed companies are issuing EBs backed by treasury shares to circumvent this requirement. As of the day before, a total of 51 companies had announced treasury share-backed EB issuances this year, already far surpassing last year’s record of 11. While companies view this as a preemptive measure to address threats to management rights posed by the cancellation of treasury shares, it is difficult to avoid criticism that this practice, which effectively has the same impact as a third-party allotment capital increase, infringes on shareholder interests.

Lee Sangheon, a researcher at iM Securities, pointed out, “The acquisition of treasury shares is recognized as a key means of shareholder return, alongside dividends, as it returns company profits to shareholders in cash.” However, he also noted, “In Korea, there are problems such as companies misusing treasury shares acquired for the purpose of strengthening the controlling shareholder’s influence.” He explained that listed companies reduce the number of voting shares in circulation through treasury share buybacks, thereby strengthening the voting rights of the controlling shareholder’s stake.

Park Hyunjung, a researcher at Daishin Securities, said, “In the United States, treasury share buybacks are followed by cancellations, so the market perceives buybacks as reducing the number of shares in circulation. In contrast, Korean companies do not cancel acquired treasury shares, instead using them as a means of defending management rights or for arbitrage.” She emphasized, “If the third amendment to the Commercial Act makes the cancellation of treasury shares mandatory, treasury share buybacks will reduce the number of shares in circulation, making it possible to improve earnings per share (EPS).”

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