[CB Crisis]⑬ SG Faces Early CB Redemption Risk Amid Profitability Decline

Profit Squeeze from Cost Burden and Interest Rate Rise
12th Round CB Put Option Exercisable from January Next Year
Profitability Improvement Crucial in Second Half of This Year

[Asia Economy Reporter Hyungsoo Park] Asphalt concrete manufacturer SG has seen its profitability deteriorate due to rising raw material prices and interest rates. Coupled with sluggish domestic stock market performance, its stock price is retreating. The likelihood of exercising the early redemption right (put option) on previously issued convertible bonds (CB) has increased.

According to the Financial Supervisory Service's electronic disclosure system on the 27th, SG recently fully redeemed the first series of convertible bonds issued in July 2018. Although the maturity was scheduled for June next year, bondholders exercised the early redemption right (put option). This year, SG's stock price fell by 30%, dropping below the conversion price. Bondholders received 87 million KRW in interest on the principal of 1 billion KRW. At the time of issuance in 2018, the CB maturity interest rate was only 2%. The expected yield if held to maturity was just 10.4%.

Considering the rise in interest rates and the sluggish stock market, bondholders likely judged that exercising the put option to secure cash was advantageous. Earlier, SG issued the 12th series of CBs worth 16.5 billion KRW in early last year to redeem the first series of CBs. Of this, 10 billion KRW was allocated for debt repayment, and the remaining funds were planned to be used for operating and facility expenses. The bonds were issued with a 0% nominal interest rate and a 1% maturity interest rate. Although the conversion price decreased compared to when the first series of CBs were issued, the interest rate conditions improved.

As of the end of the first half, SG still has outstanding CBs worth 27.9 billion KRW. These include the 7th, 9th, and 12th series of CBs issued between 2020 and 2021. The conversion prices range from 1,695 to 1,896 KRW, which are higher than the current stock price of 1,450 KRW. The put option exercise period for the 12th series CB begins on January 19 next year.

Depending on the stock price situation early next year, a large-scale cash outflow may occur. This is why attention is focused on whether performance will improve in the second half of this year. SG recorded sales of 30.6 billion KRW and an operating loss of 6.7 billion KRW in the first half of this year. Sales decreased by 5.9% compared to the first half of last year. Operating profit turned to a loss compared to 200 million KRW in the first half of last year. This was the result of rising raw material prices, transportation costs, and other expenses.

The main raw material for asphalt concrete is asphalt oil. Asphalt oil is influenced by crude oil prices. Due to the Russia-Ukraine war, international crude oil prices have risen, causing the price of asphalt, a crude oil byproduct, to continuously increase. The average purchase price per kilogram rose 41% from 612 KRW last year to 863 KRW in the first half of this year. Additionally, the unit prices of subsidiary materials and transportation costs have also increased, worsening profitability.

Interest expenses have also increased due to rising interest rates. As of the end of the first half, a 1% increase in interest rates results in an additional interest expense of 400 million KRW. The debt ratio stood at 141.5%.