Jungang D&M Removes CB Refixing... "In Response to New Business Performance Visibility"

Jungang D&M announced on the 1st that it has deleted the refixing (conversion price adjustment) clause through an agreement with the convertible bond (CB) bondholders who were existing investors. As performance improvement through new businesses is becoming visible, the risk factors affecting performance are being resolved, and the visibility of performance is expected to improve.

Jungang D&M recorded a net loss of 68.7 billion KRW in the second quarter of this year (a half-year net loss of 78.5 billion KRW). This was mainly due to book evaluation losses from the issuance of CBs, and no actual cash outflow occurred.

According to Korean International Financial Reporting Standards (K-IFRS), complex financial instruments such as CBs are classified as either 'equity' or 'financial liabilities' depending on whether the number of shares to be converted is fixed. If the number of conversion shares is fixed, it is classified as 'equity'; if it is subject to change, it is recognized as a 'financial liability.'

CBs with refixing clauses cause changes in the number of conversion shares, so they are recognized as 'financial liabilities,' and related valuation gains or losses affect net income. The stock value of Jungang D&M has significantly increased due to expectations for the secondary battery new business. As a result, the conversion price valuation amount was recorded as a financial liability, which increased the debt ratio and losses from an accounting perspective.

The related liabilities disappear when conversion occurs or the refixing clause is deleted, being recorded as capital stock and capital surplus. Jungang D&M expects a capital increase effect of approximately 92.8 billion KRW to occur from the second half of the year through the deletion of the refixing clause (12th issuance) and the conversion of existing CBs (10th issuance).

A Jungang D&M official explained, “Although it is a simple book loss, we have deleted the problematic refixing clause through a smooth agreement with existing CB investors,” and added, “With the secondary battery core raw material distribution business also proceeding in the second half, the improvement of the financial structure will accelerate.”

Jungang D&M recently signed a lithium salt supply contract worth 6.1 billion KRW with Enchem, the world's 4th largest electrolyte market share company. Jungang D&M expects annual sales of about 100 billion KRW. This is because Enchem has entered all major battery production bases worldwide, including the US and Europe, supplying electrolytes to global companies.