[Bio Shaking the Market] ① Jinwon Saengmyeong Science Prepares to Issue 'Par Value Limit CB·BW'

[Asia Economy Reporter Jang Hyowon] Jinwon Life Sciences, whose stock price surged recently due to the novel coronavirus disease (COVID-19) issue, has put forward an agenda at this regular shareholders' meeting to adjust the conversion price of convertible bonds (CB) and bonds with warrants (BW) down to the par value (1,000 KRW).

Until now, funds were mainly raised through capital increases, but this is interpreted as a plan to expand fundraising methods to CB and BW, which have simpler procedures than capital increases. However, if the conversion price limit is set to the par value, investors who subscribe to CB and BW have more opportunities to profit even if the stock price falls, but for existing shareholders, the increase in the number of shares could be a factor diluting the stock price.

◆ CB·BW Refixing Limit 1,000 KRW... Number of Shares Increases if Stock Price Falls

According to the notice of convocation for Jinwon Life Sciences' shareholders' meeting on the 17th, Jinwon Life Sciences plans to resolve an amendment to the articles of incorporation at the regular shareholders' meeting to be held on the 31st. The agenda includes setting the issuance limit and refixing (conversion price adjustment) limit for CB and BW.

CB is a bond that can be converted into shares equivalent to the issuance amount instead of redemption. BW is a bond that grants the right to subscribe to new shares. Refixing is an agreement to lower the conversion price if the stock price falls below the initially set conversion price.

Looking at the agenda in detail, Jinwon Life Sciences set the total par value limit for CB and BW at 500 billion KRW. If the agenda passes, Jinwon Life Sciences can issue CB and BW up to 500 billion KRW with only a board resolution. Issuing CB and BW is simpler than a paid-in capital increase, which requires submitting an investment prospectus and other cumbersome procedures. There is also no risk of under-subscription due to shareholders' absence, as can happen in shareholder-allocated capital increases.

Additionally, Jinwon Life Sciences set the minimum conversion price adjustment limit due to market price decline at the par value of 1,000 KRW. For example, if the conversion price was 6,400 KRW (previous day's closing price), even if the stock price falls by 84%, the conversion price will continue to be adjusted, so CB and BW investors do not incur losses. The problem is that the number of shares converted increases accordingly, which can dilute the value of existing shareholders' shares.

Accordingly, the Capital Market Act stipulates that the minimum conversion price adjustment limit should be around 70%. However, if a company wants to issue bonds that can adjust the conversion price down to the par value, it must amend the articles of incorporation through a special resolution at the shareholders' meeting, as Jinwon Life Sciences is doing.

◆ 16 Years of Deficits and 110 Billion KRW in Capital Increases... Will CB and BW Fill the Gap?

Jinwon Life Sciences has recorded losses for 16 years from 2004 to last year. The accumulated net loss amounts to 115.8 billion KRW. Nevertheless, the company has been able to sustain itself due to fundraising. In particular, shareholder-allocated paid-in capital increases were the main source of funds.

After being acquired by the US company VGX at the end of 2005, Jinwon Life Sciences conducted a total of seven rounds of shareholder-allocated and general subscription paid-in capital increases, raising 110 billion KRW. In contrast, funds raised through CB and BW were relatively small, with 37 billion KRW from CB and 19 billion KRW from BW. Last year, the company also conducted a paid-in capital increase to redeem CB.

Accordingly, the market expects Jinwon Life Sciences to focus on raising funds through bond issuance such as CB and BW rather than capital increases in the future. However, since bonds similar to stocks can be issued without shareholders' consent, concerns about stock price dilution remain.

A Jinwon Life Sciences official said, “We lowered the refixing limit so that CB and BW investors can convert to shares rather than redeem.” He added, “There is currently no plan to issue bonds, but we proposed the amendment to the articles of incorporation to keep various options open for fundraising.”