Only 3.9% Out of 17%... KCC Dashes Cancellation Hopes, Stock Price Plunges

9.9% Allocated for 430 Billion Won EB Issuance
Mandatory Cancellation Looms... Criticism Over Evasive Strategy
Stock Drops 17%, Reflecting Investor Disappointment

As KCC decided to utilize most of its treasury shares for the issuance of exchangeable bonds (EB), controversy is growing among investors. While the company claims this is a move to stabilize its financial structure, market voices argue that it runs counter to the recent trend of institutional changes aimed at enhancing shareholder value, such as mandatory treasury share cancellation. Since KCC's stock price had surged in recent months on expectations of treasury share cancellation, this decision is immediately generating a backlash in the market.

According to KCC on September 25, the company plans to cancel 3.9% of its treasury shares, which account for 17.2% of its total outstanding shares. Of the remaining shares, 9.9% will be used for EB issuance, and 3.4% will be contributed to the company’s employee welfare fund. The scale of the EB issuance amounts to approximately 430 billion won. KCC stated, "This plan aims to balance the interests of all stakeholders by simultaneously returning profits and strengthening long-term corporate competitiveness."

An EB is structured so that bondholders lend funds to the company and receive repayment in treasury shares at maturity. Since it allows the issuer to raise funds without issuing new shares, the burden on the company is lower, and investors benefit from potential capital gains if the stock price rises. The ability to use the secured liquidity for new investments or as a source for dividends is also viewed positively.

However, market sentiment remains cold. With the passage of a bill mandating treasury share cancellation imminent, listed companies are actively resorting to EBs to avoid cancellation. The market believes KCC’s decision is also rooted in this context.

Given that treasury shares can be used as a tool for management control, this move can be interpreted not only as a means of raising funds but also as a strategy to strengthen long-term governance by issuing EBs to friendly parties. Recently, the court sided with the company in Taekwang Industrial’s injunction lawsuit regarding EB issuance, providing institutional grounds for issuing EBs backed by treasury shares, which is further encouraging such moves by companies.

KCC maintains that this decision was inevitable to stabilize its financial structure. The company explained that it needed to secure liquidity to repay debt incurred during the acquisition of Momentive, a U.S. silicon company. In July, KCC issued EBs using its holdings of HD Korea Shipbuilding & Offshore Engineering shares as underlying assets to cover interest expenses. At the time, LS Securities commented in its report, "It is regrettable that the company issued EBs instead of reducing debt through the sale of financial assets."

Moreover, since market interest had been heightened by expectations of treasury share cancellation, shareholder backlash is intense. Treasury share cancellation is a direct means of returning value to shareholders by reducing the number of outstanding shares and driving up the stock price. For companies with a high proportion of treasury shares, market expectations have been particularly strong, and KCC’s stock price had risen more than 40% over the past three months.

KCC’s stock price plummeted on September 24, when the treasury share cancellation plan was announced. During the session, it fell as much as 17% from the previous day to 346,000 won before closing at 368,000 won. The rally that had continued until recently was abruptly reversed. Currently, KCC’s price-to-book ratio (PBR) stands at 0.38, indicating that the stock remains undervalued. KCC has recently set a goal of reaching a PBR of 1 within five years. Whether the use of treasury shares will remain merely a financial stabilization measure or lead to substantial shareholder returns is expected to determine the future direction of KCC’s stock price.

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