[CB Crisis] Why Is It a Loss to Convert Sonogong CB into Stocks Now?

8th CB Conversion Price at 2,105 Won per Share... Sonokong Stock Price Around 1,940 Won
Sonokong Turns to Deficit and Lacks Growth Drivers, Investors Analyzed to Cut Losses

[Asia Economy Reporter Jang Hyowon] Toy distributor Sonokong had some of the convertible bonds (CB) issued last year converted. Despite the current stock price being lower than the conversion price, conversion was requested.

According to the Financial Supervisory Service's electronic disclosure on the 23rd, about 600 million KRW worth of Sonokong's 8th series CB was converted on the 20th. The newly issued shares will total 285,034 and are scheduled to be listed on January 10, 2023.

CBs are bonds that can be converted into stocks. CB investors can convert to stocks and gain profits if the stock price is higher than the conversion price after a certain period. In the opposite case, they usually receive only maturity interest and request repayment.

The conversion price of the 8th series CB converted in Sonokong this time is 2,105 KRW per share. As of the previous day, Sonokong's stock price was moving around 1,940 KRW. If the current stock price level continues until the new shares are listed, CB investors will incur losses.

The 8th series CB was issued last September with a scale of 5 billion KRW. The nominal interest rate is 0%, but the maturity interest rate is 1%, so interest can be received upon repayment. This CB allowed the exercise of an early redemption right (put option) starting last September, one year after issuance. As of the 7th, investors could receive 101.2562% of the principal upon redemption request.

Nevertheless, CB investors chose conversion over redemption, foregoing fixed interest income. Although the conversion amount is small, it is attracting market attention. This CB was initially issued to Eugene Securities and then fully sold down (resold). The current CB owner is unknown.

The market offers various interpretations of this CB conversion. First, it is analyzed that investors chose to cut losses as the company itself lacks the capacity for repayment and the stock price shows no signs of rising further.

As of the end of the third quarter, Sonokong's cash equivalents stood at 3.2 billion KRW. To repay the 5 billion KRW CB, additional borrowing or fundraising is necessary. Performance is also sluggish. As of the end of the third quarter, Sonokong's cumulative sales were 43.7 billion KRW, down 12.3% year-on-year, and operating profit turned to a loss. The cumulative loss is about 3.5 billion KRW.

Sonokong is a company that grew by distributing famous toys such as "Hello Carbot" and "Turning Mecard." However, it has been evaluated by the industry as lacking growth momentum because it only operates distribution business without its own intellectual property (IP) products. Although the largest shareholder changed from Mattel, famous for Barbie dolls, to CEO Kim Jongwan, a professional manager, in October, a clear vision is hard to find.

Some also raise the possibility of a change in the largest shareholder. If all the 8th series CBs are converted, including the amount converted this time, a total of 2,375,295 new shares will be issued. This corresponds to 8.8% of the total issued shares. Currently, the largest shareholder, CEO Kim, holds 1,735,619 shares (6.45%). If one investor holds all the 8th series CBs, they could surpass CEO Kim's stake.