[Funding] Ssangbangwool, New Mask Business Amid Innerwear Slump...Large-Scale Capital Increase

Issued 0.718 New Shares per Guju Share to Raise 56.5 Billion KRW
Unable to Cover Interest Expenses with Own Cash Flow... 32 Billion KRW for Debt Repayment
Invested 12.9 Billion KRW in Mask Equipment... Full Operation Expected from November

[Asia Economy Reporter Hyungsoo Park] Ssangbangwool has launched a large-scale fundraising through a rights offering. This move comes as the need to improve its financial structure and pursue new business has grown due to declining sales of its main product, underwear, caused by brand aging and the impact of the novel coronavirus disease (COVID-19).

According to the Financial Supervisory Service on the 4th, Ssangbangwool will proceed with the capital increase by allocating 0.718 new shares per existing share. Based on the expected new share issuance price of 565 KRW, a total of 56.5 billion KRW will be raised.

The lead underwriter, Eugene Investment & Securities, diagnosed that Ssangbangwool's operating cash flow is insufficient and significant interest expenses are incurred from borrowings, so it is necessary to repay the debt to improve the efficiency of fund management. As of the end of March, Ssangbangwool's consolidated borrowings amounted to approximately 52.6 billion KRW, all of which are short-term borrowings. This is an increase of 7.4 billion KRW compared to 45.2 billion KRW at the end of last year.

As of the end of the first quarter on a consolidated basis, the debt ratio was about 88.2%, down 16.8 percentage points from 105.0% at the end of last year. The debt ratio fell due to a 25.5 billion KRW decrease in current derivative liabilities compared to the end of last year. Ssangbangwool has continued to suffer poor performance, with operating profit smaller than interest expenses payable since last year. It is borrowing working capital by pledging its holdings of Nanos shares as collateral.

Korea Ratings explained that Ssangbangwool's TRY brand power has weakened, and combined with the impact of COVID-19, retail sales at dealerships have sharply declined. Since March, order volumes from dealerships have significantly decreased. As inventory assets within dealerships have increased, it is expected to take considerable time to recover order volumes. They expressed concerns that profitability will continue to deteriorate due to the burden of cost of goods sold caused by declining sales.

Ssangbangwool plans to use 32 billion KRW of the raised funds to repay debt. It will use 22 billion KRW to repay short-term borrowings from financial institutions and allocate 10 billion KRW to prepare for early redemption requests of the 7th series convertible bonds.

The maturity date of the 7th series convertible bonds is October 2, 2022, and early redemption can be requested from October 2. The conversion price of the convertible bonds is 868 KRW, while Ssangbangwool's stock price is below 800 KRW. Considering the adjustment of the conversion price after finalizing the new share issuance price, the stock price level makes it difficult to decide on common stock conversion and early redemption. The 7th series convertible bonds are held by Ssangbangwool's affiliate Namyoung Vivian. If Ssangbangwool repays as planned, it is expected to have a significant effect in reducing interest expenses. The interest rate on the convertible bonds is 6.0%.

Ssangbangwool aims not only to improve its financial structure through the rights offering but also to raise investment funds for new businesses to offset the decline in sales of its main products.

Of the raised funds, 12.9 billion KRW will be used to construct three new buildings for a quarantine mask factory on the existing Iksan plant site. Production equipment such as 3D manufacturing facilities, 2D manufacturing facilities, dental manufacturing facilities, inspection equipment, and MB filter equipment will be purchased and installed. The existing two buildings will undergo remodeling due to factory aging.

Currently, Ssangbangwool uses the Iksan plant as a logistics warehouse and for outsourced management offices. After remodeling, it will be used as a logistics warehouse for quarantine masks. Ssangbangwool expects that building a quarantine mask factory will increase profitability by producing masks in-house, which are currently produced through outsourcing.

However, although mask demand surged due to COVID-19, it is difficult to predict mask demand after Ssangbangwool begins full-scale direct production in November this year. Moreover, the steady increase in supply also raises uncertainty about the effectiveness of large-scale investment in the mask business.

According to the Ministry of Food and Drug Safety, mask production reached 180.69 million units during the week from the 27th of last month to the 2nd of this month, a 7.0% increase compared to the previous week (July 20?26). This is the largest production volume since statistics began in February.