[Corporate Financing] Ecomister Temporarily Eases Cash Crunch with Rights Offering... Urgent Need for Performance Improvement

[Asia Economy Reporter Yoo Hyun-seok] Three years after listing on KOSDAQ, Ecomaister is launching a large-scale third-party allotment rights offering. Most of the funds raised through the rights offering are planned to be used for repaying short-term borrowings this year. Since the company has recorded net losses for two consecutive years, this rights offering aims to improve its deteriorated financial condition, making performance improvement an urgent matter.

Ecomaister was established in 1976. It manufactures railway vehicle inspection equipment and operates a business recycling steel and non-ferrous metal slag, which are industrial wastes generated in metal manufacturing processes. The company entered the KOSDAQ market in 2018 through a technology special listing.

◆ Ecomaister's 5th Convertible Bond Investors Participate in Third-Party Rights Offering for 'Debt-to-Equity Swap'

On the 31st of last month, Ecomaister decided on a third-party allotment rights offering worth 17.8 billion KRW to Synergy IB Investment to improve its financial structure through debt offsetting. Synergy IB Investment is a corporation with Synergy Partners as the largest investor, and this rights offering was made to offset the 5th convertible bonds (CB). The 5th CB was issued in May 2018. The conversion request period is from May 9 last year to April 9, 2022. The eligible parties include Synergy Partners, KB Securities, and Shinhan Financial Investment, who are the current third-party allotment rights offering recipients.

The reason issuers offset CBs through the rights offering and effectively converted debt to equity is interpreted as Ecomaister lacking funds and the stock price having fallen significantly, making conversion unattractive. On the 9th, the conversion price of Ecomaister's 5th CB was 7,179 KRW, while the closing price on the 17th was 2,260 KRW. Since the conversion price is more than three times higher than the current stock price, there is no incentive to convert. The problem is that as of the end of last year, Ecomaister's cash equivalents on a consolidated basis were only 943.72 million KRW, indicating no spare funds to repay the convertible bonds.

Synergy Partners and others significantly lowered the subscription price for the rights offering in exchange for converting debt to equity this time. The new share issuance price for this rights offering is 1,285 KRW, nearly 1,000 KRW lower than the current stock price. Compared to the existing CB conversion price, it is 5,894 KRW lower. Essentially, the conversion price was reduced from 7,179 KRW to 1,285 KRW to effect the debt-to-equity swap. As a result, they acquired the status of the largest shareholder. After the rights offering, the largest shareholders of the company will change from Osang-yoon, CEO of Ecomaister, and 11 others to Synergy IB Investment and 5 others. CEO Oh's stake will be diluted from 9.28% to 4.59%, while Synergy IB will hold 20.25%.

A Synergy Partners representative explained, "Ecomaister, invested in through CBs by institutions including Synergy IB, recently faced financial issues such as loan delinquencies, making normal business operations difficult. To support Ecomaister's financial structure improvement and business normalization, institutions including Synergy IB converted the previously invested convertible bonds into in-kind contributions and proceeded with a third-party allotment of convertible preferred stock rights offering."

◆ Following Third-Party Allotment, Shareholder Rights Offering... The Unfinished Crisis: 'Debt Repayment and Performance Improvement'

Although nearly 18 billion KRW was converted to equity, on the 14th, Ecomaister decided to proceed with a rights offering of approximately 16.6 billion KRW through a shareholder allotment followed by a general public offering of unsubscribed shares. About 13 million common shares will be issued at 1,275 KRW per share, with the record date set for May 19 and the payment date on July 2. The listing is scheduled for July 14. Ecomaister plans to use 3.139 billion KRW for operating funds, 12.885 billion KRW for debt repayment, and 551 million KRW for other expenses.

The reason most of the funds raised through the rights offering will be used for debt repayment is due to the rapidly deteriorating financial condition. Sales on an individual basis increased from 12.7 billion KRW in 2018 to 15.3 billion KRW last year, but operating losses rose from 14.7 billion KRW to 18.2 billion KRW during the same period. Deficits also increased from 37.1 billion KRW to 46.5 billion KRW. Additionally, the debt ratio jumped from 94.70% in 2017 to 375% in 2018 and 533% last year, while short-term borrowings dependency rose from 32.1% to 51.9%. The total amount of borrowings and bonds maturing this year amounts to 10.889 billion KRW.

As a result, external auditors have warned about uncertainties regarding the company's ability to continue as a going concern. Ichon Accounting Firm, which audited Ecomaister, explained, "Net loss and operating loss of 9.38 billion KRW and 1.816 billion KRW respectively occurred, and as of the financial statement date, the company's current liabilities exceed current assets by 38.912 billion KRW."

The fortunate point is that the possibility of the rights offering being undersubscribed is low. The subscription price of 1,275 KRW is quite attractive compared to the current stock price in the 2,000 KRW range, and even if undersubscription occurs, the remaining shares will be acquired by the lead underwriter and the underwriting company. The ratio is 70% by the lead underwriter Hanyang Securities and 30% by the underwriting company Ebest Investment & Securities.

Even if the rights offering temporarily resolves urgent issues, ultimately, performance is key. If a large net loss occurs again like in 2018, capital erosion could occur. Ecomaister stated in its investment prospectus, "If a large net loss similar to that in 2018 occurs again at the end of this year, it could cause problems in profitability and financial stability. In particular, if a large net loss occurs, deficits may affect equity, leading to the possibility of capital erosion." It added, "Accounts receivable and other receivables are continuously being written off, and if they are written off again in 2020 depending on collectability, it could negatively impact the company's financial statements. If capital erosion occurs, the company may be designated as a management item or delisted depending on the capital erosion ratio."

Meanwhile, Synergy Partners expects the financial condition to improve as most of the rights offering proceeds will be used for debt repayment. A Synergy IB representative emphasized, "Since most of the funds will be used for debt repayment, we expect the debt ratio to decrease. Synergy IB Investment and Synergy's management professionals have various achievements in normalizing management of companies facing limits or various management issues. Going forward, through joint management with the existing management, we plan to improve the company's structure, enhance value, and promote the interests of shareholders and the company."