[Funding] Ssangyong Information & Communications Loses First Trial in Progress Payment Refund Lawsuit, 'Deterioration of Financial Structure'

Proceeding with Rights Offering and Capital Reduction to Improve Financial Structure
Raised 25.4 Billion KRW to Repay 17 Billion KRW Debt... Expecting Reduced Interest Expenses
Operating Funds to Expand Cloud Business

[Asia Economy Reporter Park Hyungsoo] Ssangyong Information & Communications has launched a large-scale paid-in capital increase to improve its financial structure. Following a loss in the first trial of the progress payment refund lawsuit, the company recorded a large loss last year. It is expected to reduce its debt ratio and interest expenses by repaying short-term borrowings and private bonds.

According to the Financial Supervisory Service's electronic disclosure system on the 13th, Ssangyong Information & Communications will raise funds through a rights offering allocating 0.465 new shares per existing share, followed by a general public offering of forfeited shares. The planned issue price of the new shares is 1,080 KRW, and a total of 23.5 million shares will be issued. It will raise 25.38 billion KRW, using 17 billion KRW to repay debts and the remainder for operating funds.

Ssangyong Information & Communications plans to use the funds raised from the capital increase to repay 7 billion KRW in short-term borrowings and 10 billion KRW in private bonds. Among the total short-term borrowings of 13 billion KRW, the company plans to repay the higher interest-bearing debts mainly in the fourth quarter of this year. Private bonds maturing in December this year and June next year will also be repaid with the raised funds.

The remaining funds will be used to expand the cloud business. The company will newly hire 23 cloud specialists. A budget of 2.5 billion KRW has been allocated, including 1.64 billion KRW for direct labor costs and 860 million KRW for indirect costs such as the four major social insurances and severance pay. Along with hiring specialists, 5.88 billion KRW will be spent on purchasing cloud equipment.

Ssangyong Information & Communications is a company that provides integrated infrastructure system construction and maintenance, as well as information system construction and operation services. It has built systems such as the Intelligent Pension Welfare System for the Government Employees Pension Service's digital transformation, the next-generation bond management system for the Korea Asset Management Corporation, and the regional health care information system for the Ministry of Health and Welfare. As a mid-sized system integration (SI) company, Ssangyong Information & Communications has a high sales proportion from defense projects. From August 2015 to August last year, it completed a long-term project to upgrade the Navy's Joint Command and Control System (C4I).

Last year, the company recorded sales of 120 billion KRW, an operating loss of 10.5 billion KRW, and a net loss of 13.5 billion KRW. Although sales increased by 10.8% compared to the previous year, operating and net losses turned negative. Following the loss in the first trial of the progress payment refund lawsuit pending since February, the company recognized 12.6 billion KRW in cost of sales and 3.382 billion KRW in other expenses as litigation provisions, worsening profitability. Due to the large-scale deficit, the capital erosion ratio reached 30.7%, indicating partial capital erosion.

The debt ratio rose from 86.0% in 2019 to 310.6% last year. The interest coverage ratio, an indicator of a company's ability to meet interest payment obligations on debt, also deteriorated from 4.6 to minus (-) 63.3 during the same period. An interest coverage ratio below 1 means that the operating profit earned by the company was less than the interest expenses to be paid.

Ssangyong Information & Communications is also conducting a stock split and a free capital reduction along with the fund raising to improve its financial structure. The par value of shares will be split from 1,000 KRW to 500 KRW. The total number of issued shares will increase from 40,464,017 shares to 80,928,068 shares, and then a 2-for-1 reverse stock split will be implemented. As a result, the total number of issued shares will remain 40,464,017 shares. While the total capital remains unchanged by replacing capital surplus generated from the capital reduction gain and deficit, the deficit will be eliminated.

Previously, Ssangyong Information & Communications won the 2nd Fleet Maritime Comprehensive Tactical Training Center project in 2013, which involved creating a system capable of near-realistic anti-submarine training using computers and simulators. In 2017, after Ssangyong Information & Communications failed the operational test evaluation, the Navy canceled the contract and announced plans to recover progress payments and deposits. Ssangyong Information & Communications filed a lawsuit to confirm the non-existence of liability for damages related to the service contract and the refund of progress payments and interest. The government responded by filing a lawsuit demanding the refund of payments.