CB Investors Secretly Smiling Amid Cape Management Dispute

[Asia Economy Reporter Yoo Hyun-seok] As Cape becomes embroiled in a management rights dispute, convertible bond (CB) investors are expected to reap substantial profits. This is because the stock price has risen compared to the conversion price amid the management rights conflict.

According to the financial investment industry on the 6th, Cape announced the exercise of conversion rights for the 7th and 8th series CBs on the 26th of last month and the 4th of this month, respectively.

The number of conversion shares for the 7th series is 1,076,233 shares, with an exercise amount of 2.4 billion KRW and a conversion price of 2,230 KRW. The scheduled listing date is the 10th of this month, and the remaining balance after conversion is 3.8 billion KRW. For the 8th series, the number of conversion shares is 625,000 shares, amounting to 1.4 billion KRW. The conversion price is 2,240 KRW, and the scheduled listing date is the 16th of this month. The remaining balance is 1.2 billion KRW.

In February 2018, Cape issued CBs worth 8 billion KRW to the POSCO-KB Shipbuilding Investment Association. The nominal interest rate was 1.0%, the maturity interest rate was 3.0%, and the conversion price at that time was 3,185 KRW. The conversion period was from February 23 last year to January 23 next year. In the same month, Cape also issued 4 billion KRW worth of 8th series CBs to Seungtae and NongHyup Bank. The conversion price was 3,195 KRW, and the conversion claim period was from February 26 last year to January 26 next year.

The closing price of Cape on the previous day was 5,190 KRW, which is a 132.7% increase compared to the conversion prices of the 7th and 8th series CBs. Based on this, if CB investors sell their shares, the 7th series would amount to 5.58564 billion KRW, and the 8th series would be 3.24375 billion KRW. If the current stock price is maintained until the scheduled listing date, investors can earn a difference of about 3.1 billion KRW for the 7th series and about 1.8 billion KRW for the 8th series compared to their investment amounts.

Cape's stock price surged recently due to the management rights dispute. Until December 30 last year, Cape's stock price was 2,060 KRW. However, starting in January, KHI expanded its stake in Cape, driving the stock price upward. On January 23, KHI purchased 1,434,978 shares of Cape CB held by the POSCO-KB Shipbuilding Investment Association on the market, increasing its stake to 8.77%. Adding the 4.54% stake acquired by the special related party Hwashin Trading, the total reaches 13.31%. Furthermore, on the 21st of last month, KHI and Hwashin Trading further increased their stakes in Cape to 14.37%. The purpose of holding these shares was to exercise shareholder rights.

As KHI, which expanded its stake, initiated a lawsuit, the management rights dispute intensified. On the 2nd, Cape announced that KHI filed a provisional injunction for agenda submission at the Ulsan District Court. The main content is that at the regular shareholders' meeting to be held this month, some articles of incorporation amendments, including the appointment of outside directors, must be submitted as agenda items. Additionally, on the 3rd, KHI filed a provisional injunction to inspect and copy the shareholder register. As a result, Cape's stock price rose 80.52% compared to the end of last month based on the previous day's closing price. In other words, although Cape is in a troublesome situation due to the management rights dispute, CB investors are able to secure considerable gains from the stock price increase.