[CB Crisis] Kumho Electric Repurchases 21 Billion KRW of 'Unused CB'... Will It Be Used as a Succession Tool?

[Asia Economy Reporter Jang Hyowon] Kumho Electric is repurchasing convertible bonds (CB) worth 21 billion KRW by exercising a call option (put right). These CBs were originally issued not for the company’s fundraising purposes but to gain profits from CB arbitrage. However, given the current stock price level, it is difficult to expect profits, drawing attention to whether it will be used as a succession tool by Chairman Jung Kyuyong.

According to the Financial Supervisory Service’s electronic disclosure on the 25th, Kumho Electric decided to exercise the call option on the 9th series CB. The 9th series CB was issued on November 26 last year with a scale of 30 billion KRW. Kumho Electric can repurchase 70% of this, amounting to 21 billion KRW, through the call option.

Kumho Electric stated, “The bonds acquired by exercising the call option will be either refinanced through resale or canceled in the future.” The plan for handling the CB is undecided, but the company intends to repurchase them for now.

Kumho Electric issued the 9th series CB to Meritz Securities at a nominal interest rate of 2% and a maturity interest rate of 5%. If Kumho Electric exercises the call option on the 28th, it will pay bondholders an annual compound interest of 5% and retrieve the CBs.

These CBs were not issued because Kumho Electric needed funds. Kumho Electric used the 30 billion KRW raised from issuing the CBs to purchase bank bonds. The bank bonds were provided as collateral for the issued CBs. The bank bonds, which had a lien set on them, were restricted from use and were simply held. Although funds were raised, it is interpreted that the CBs were not issued because the company needed funds.

The reason Kumho Electric issued CBs that it could not utilize financially is interpreted as an intention to give someone CB arbitrage profits through exercising the call option. If the stock price rises above the CB conversion price, CB holders can convert the CBs into shares and gain profits.

However, it is expected to be difficult to expect immediate profits at the current stock price level. The conversion price of the 9th series CB is 1,070 KRW. Kumho Electric’s stock closed at 1,010 KRW as of the previous day. After exercising the call option, if the CBs are converted into shares, the increased supply could put downward pressure on the stock price.

Nevertheless, this CB is a secured bond with a refixing (conversion price adjustment) floor set at the face value of 500 KRW, providing a safety net. Therefore, the company may hold the CBs for now and resell them when the stock price rises, allowing someone to enjoy CB arbitrage profits.

Some speculate that the CBs could be used for succession purposes. Kumho Electric’s largest shareholder is Chairman Jung Kyuyong, who holds 3,010,536 shares (10.93%). Along with Chairman Jung, family members and affiliated companies such as Shinju Holdings, Yangjeong Industry, and KB Vision Investment Association No.1 also hold shares. Their total shareholding ratio is 33.47%.

The core of Kumho Electric’s governance structure is Shinju Holdings and President Jung Heonwook. President Jung is known to be Chairman Jung’s son. The largest shareholder of Shinju Holdings is President Jung, holding 84.18% of the shares. As of the end of the third quarter this year, Shinju Holdings and President Jung hold 5.16% and 0.99% of Kumho Electric shares respectively, making them major shareholders.

If Shinju Holdings or President Jung purchases the CBs worth 21 billion KRW and converts them into shares at the conversion price of 1,070 KRW, they can secure 19,626,168 shares. Including newly issued shares, their shareholding ratio would rise to 45.2%, making them the largest shareholder at once.

Meanwhile, Shinju Holdings is a corporation in a state of complete capital erosion, with total assets of 11.1 billion KRW, total liabilities of 14.9 billion KRW, and total equity of -3.7 billion KRW. It has no sales and only records net losses.