Pulmuone Group Issues New Type of Securities Again... Increasing Actual Financial Burden Despite Lower Debt Ratio

Subsidiaries of the Pulmuone Group are consecutively issuing perpetual bonds (hybrid bonds) to raise funds. This measure aims to prevent a surge in the debt ratio caused by losses from overseas investments. However, despite perpetual bonds being accounted for as equity, concerns are emerging that the high repayment obligations and interest burdens are actually increasing the group's real financial strain.

Overview of Pulmuone China Corporation Pumeiduo Beijing Plant 1 located in Pinggu District, Beijing, China

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According to the investment banking (IB) industry on the 24th, Pulmuone Foods is planning to issue public perpetual bonds underwritten by NH Investment & Securities and Korea Investment & Securities. The issuance is scheduled for next month (November), and the public offering process, including the submission of the securities registration statement, is expected to begin soon. The planned issuance amount is 40 billion KRW, with the target interest rate for demand forecasting known to be in the mid-6% range.

Pulmuone and its subsidiary Pulmuone Foods have been raising capital by consecutively issuing perpetual bonds amid deteriorating financial conditions due to losses from overseas investments. By issuing perpetual bonds, which can be recognized as equity in accounting, they expect to improve their financial structure by lowering the debt ratio.

This will be the third perpetual bond issuance this year alone. In July, Pulmuone issued 70 billion KRW worth of perpetual bonds, and earlier in March, Pulmuone Foods issued 50 billion KRW worth. After the public issuance in November, the outstanding balance of perpetual bonds is expected to exceed 300 billion KRW.

Despite repeated perpetual bond issuances, the debt ratios of the two companies have not increased significantly. As of the end of June this year, Pulmuone and Pulmuone Foods had debt ratios of 321.5% and 219.2%, respectively. Although not at a stable level, the issuance of perpetual bonds recognized as equity is controlling the pace of debt ratio increase.

However, considering the repayment obligations of perpetual bonds, there are concerns that the actual borrowing burden is quite high. Pulmuone’s consolidated equity, including its subsidiary Pulmuone Foods, was 508 billion KRW as of the end of June this year. Of this, about 280 billion KRW of perpetual bonds are included as equity. Excluding perpetual bonds, the actual equity is just over 200 billion KRW.

Total borrowings are on a rising trend, reaching 1.2 trillion KRW. In particular, short-term borrowings and current portion of long-term debt (long-term borrowings maturing within one year) approach 600 billion KRW. The call option exercise dates for existing perpetual bonds also begin to come due from next year, potentially increasing repayment pressure. If the call option is not exercised, interest expenses on perpetual bonds rise sharply, intensifying repayment pressure.

Consecutive perpetual bond issuances have also increased interest burdens. The issuance interest rate for perpetual bonds, which was in the 5% range until 2022, has risen to 6-8% this year due to rising market interest rates and deteriorating credit ratings.

Due to worsening financial conditions and short-term liquidity burdens, credit rating agencies have assigned a ‘negative’ outlook to the credit ratings (BBB+) of Pulmuone and Pulmuone Foods. This is a warning that if financial conditions deteriorate further, the credit rating could be downgraded to BBB.

An IB industry official said, "Perpetual bonds have the immediate effect of lowering the debt ratio, but they hardly improve the actual financial situation. If the issuance volume becomes excessive and maturities cluster with other borrowings, repayment pressure can become significant, and interest costs are higher compared to regular bonds." The official added, "For Pulmuone Group to recover its credit rating, capital increases such as shareholder contributions seem necessary."

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