[Funding] Megabox Jungang Issues Series of Private Bonds Amid COVID Shock

[Asia Economy Reporter Lim Jeong-su] Megabox Joongang has consecutively issued private bonds this year to raise funds. Due to the deterioration of the movie theater business caused by COVID-19, the burden of refinancing existing borrowings and operating funds is gradually increasing.

According to the investment banking (IB) industry on the 11th, Megabox Joongang issued private bonds worth 30 billion KRW underwritten by Hanyang Securities. The maturity is 2 years, but there is a condition for early redemption after 1 year. The underwriter acquired the private bonds through a special purpose company (SPC) and then issued short-term securitized bonds with a 3-month maturity based on these assets. The short-term securitized bonds are refinanced every 3 months.

Private bond investors can declare loss of benefit of term if Megabox Joongang’s credit rating falls below BBB- or A3-. Due to the sharp deterioration in performance caused by COVID-19, Megabox Joongang’s credit rating was downgraded from A- to BBB+ last year. The short-term credit rating is A3+. There are two notches left until the loss of benefit of term trigger.

The outlook for the corporate bond credit rating remains ‘negative,’ and the company is under downward pressure on credit due to a large deficit recorded last year. Megabox Joongang’s separate basis sales last year were 103.3 billion KRW, reduced to one-third of 320.6 billion KRW in 2019. Operating profit during the same period turned from a 39.3 billion KRW surplus to a 69.9 billion KRW deficit. This is due to the impact of COVID-19.

The financial structure is also deteriorating. Megabox Joongang’s borrowings increased significantly in 2019 due to investment in a new office building in Seongsu-dong. Borrowings, which were 130 billion KRW at the end of 2018, increased to 436 billion KRW at the end of 2019. Since last year, as the cash-generating ability of the movie theater business sharply declined due to COVID-19, borrowings increased by more than 200 billion KRW again within a year, swelling to 653 billion KRW.

Recently, by issuing private bonds and commercial paper (CP), the company has raised funds necessary for debt repayment and operations, increasing the short-term repayment burden. About 200 billion KRW of the total borrowings must be repaid or refinanced within one year. Megabox Joongang has gradually increased CP issuance, a very short-term borrowing, since COVID-19, and the recent CP balance rose to 48 billion KRW.

An IB industry official said, "Megabox Joongang is pursuing an initial public offering (IPO) to improve its financial structure, but if performance and financial structure improvements are not visible, it will be difficult to enter the stock market." He added, "For the time being, the funding pattern relying on private bonds and short-term borrowings is inevitable."