Stock Price Rises Above Conversion Price Triggering Continued Exercise of Conversion Rights
Private Placements Mainly Issued, Some Institutional Investors and 'Big Players' Reap Profits
Authorities Push for CB Issuance System Reform...“Stronger Regulations May Disrupt Fundraising” Rebuttal Also Raised
Amid the KOSDAQ index rising about 35% this year, the exercise of conversion rights on convertible bonds (CBs) continues. As demand concentrates on thematic stocks such as secondary batteries, artificial intelligence, and superconductors, some 'big players' and institutional investors are taking advantage of the rising stock prices to exercise their conversion rights and secure substantial profits.
Many of these investors sell the new shares immediately upon receipt. Therefore, the more listed companies have unconverted CBs, the more difficult it is for their stock prices to rise due to concerns over potential sell-off volumes (overhang). This situation is disadvantageous for existing shareholders and individual investors.
Moreover, most CBs in the domestic stock market are issued through private placements. Among the 214 stock-related bonds issued in the first half of this year, all but five were privately placed. Private placement CBs often represent 'blind' cases where sufficient information is not provided in advance to existing shareholders and investors.
'Their Own League' CB Investment: Minimizing Risk and Maximizing Returns
According to the Financial Supervisory Service's electronic disclosure system, YesTy will list 360,000 new shares on the 18th. An investor holding the '5th series CB' issued in May 2021 exercised conversion rights worth 4 billion KRW. The conversion price is 11,034 KRW, about half of the current stock price of 23,750 KRW. If the current level is maintained until the new shares are listed, the CB holder will earn 4.6 billion KRW, achieving an investment return of 115%.
Previously, semiconductor equipment company YesTy issued the 5th series CB to raise 20 billion KRW for acquiring securities of other companies. The conversion price, initially 15,764 KRW at issuance, has been adjusted several times down to the lowest level. After a sluggish period following the CB issuance, the stock price began to rebound this year with market recovery. The stock price surged rapidly after news emerged that the company is developing essential process equipment for the advancement of high-bandwidth memory (HBM), an AI semiconductor. Since June, the stock price has risen about 130% in just over two months.
Unitrontech will list 390,000 new shares on the 19th. Unitrontech issued the '4th series CB' worth 14 billion KRW in October 2018 to raise operating funds. The bond maturity date is next month on the 8th, and the conversion rights could be exercised until the 8th. The conversion price was 5,545 KRW at issuance but was lowered to 3,317 KRW due to rights offerings and market price declines.
Unitrontech's stock closed at 5,100 KRW on the 8th, rising nearly 30% over the past six trading days. It surpassed the 5,000 KRW mark for the first time in one year and four months based on closing price. The recent increase in expectations for the commercialization of autonomous driving influenced the stock price. Since 2019, Unitrontech has been conducting government national research projects related to autonomous driving. Thanks to the recent rapid stock price rise, CEO Namgung Seon, who held CBs, sold some shares off-market and converted others into stock.
Conversion rights exercises are also continuing for Lightron, whose stock price surged recently due to expectations of molybdenum mine development. Lightron raised 22 billion KRW by issuing the '6th series CB' and '8th series CB' in 2021. Although the conversion price was lowered due to market price declines, conversion rights exercises were uncertain until just a week ago because the stock price remained near the conversion price and about one and a half years remained until bond maturity. However, after the stock price surged to the daily limit on the 29th of last month, investors began exercising conversion rights. On the 8th, the stock price was 4,820 KRW, over 30% higher than the conversion price. The 600,000 new shares will be listed on the 18th and 19th.
After receiving conversion rights exercise requests on the 1st, Osung Advanced Materials' stock price has rebounded rapidly since hitting a yearly low of 1,193 KRW on July 26. The stock price rose more than 70% in about a month, surpassing 2,000 KRW. Due to the sharp price increase, some investors holding the '23rd series CB' exercised their conversion rights. The conversion price is 1,427 KRW, and the new shares are scheduled to be listed on the 15th. The current stock price is over 40% higher than the conversion price. CB investors will exercise conversion rights worth 2 billion KRW and receive 1.4 million new shares.
Osung Advanced Materials' subsidiary, Cannabis Medical, is researching medical marijuana using cannabinoids with KAIST. On the 30th of last month (local time), the U.S. Department of Health and Human Services (HHS) recommended the Drug Enforcement Administration (DEA) lower marijuana's legal drug scheduling. The expected downgrade in marijuana's drug scheduling is believed to have acted as a catalyst for Osung Advanced Materials' stock price rise by opening the path to marijuana legalization.
Increase in Conversion Rights Exercises with KOSDAQ Market Recovery in the First Half of the Year
In the domestic stock market, the total amount of CBs with exercised conversion rights in the first half of this year reached 1.2958 trillion KRW, a 5% increase compared to the same period last year. Compared to the sluggish second half of last year, it increased by 47%. This appears to be due to the market recovery in the first half of the year, leading to more cases where the stock price exceeds the conversion price.
Listed companies raise necessary funds through CB issuance or rights offerings. Unlike general bonds, CBs include conversion rights. After a certain period, if the stock price exceeds the conversion price set at CB issuance, holders can convert to common stock and sell. Since the potential returns exceed the annual interest rate of around 5%, the interest rate conditions are generally better than bank loans. There is also an option to adjust the conversion price when the market price falls, making CBs more preferred by investors than third-party allotment rights offerings. Some investors also require collateral to reduce the risk of principal loss.
When the stock price exceeds the conversion price, conversion rights exercises continue. This reduces the redemption burden for listed companies. Converting debt into common stock reduces liabilities and improves financial soundness compared to repaying debt with cash reserves. Unlike CB investors and issuing companies, shareholders do not want the stock price rise to be hindered by previously issued CBs. Most CB investors exercise conversion rights when they can profit by considering the conversion price and current stock price. This is why many sell the new shares immediately upon receipt. The more unconverted CBs a company has, the more the potential sell-off volume (overhang) concerns hinder stock price increases. Even after exercising conversion rights, companies like Lightron and Osung Advanced Materials still have unconverted bond balances worth tens to hundreds of billions of KRW.
The problem is that most CBs are privately placed quietly. CBs favorable to investors are usually invested in by institutional investors or some financially strong individuals. Among the 214 stock-related bonds issued in the first half of this year, all but five were privately placed. Regulatory authorities are considering improvements to the CB system, which lacks transparency due to private placements. They are also reviewing measures to prevent indiscriminate CB issuance from causing investor damage.
Kim Pil-gyu, Senior Research Fellow at the Korea Capital Market Institute, explained, "In the case of private placement convertible bonds, there are many cases where sufficient information is not provided in advance to existing shareholders and investors," adding, "This is because there is no obligation to submit a securities registration statement when issuing privately placed CBs." He further stated, "It is necessary to mandate disclosure through a major event report one week before the payment date after board resolution when issuing private placement convertible bonds."
The financial investment industry acknowledges the need for system improvements but is concerned that excessive regulation could create obstacles for listed companies to raise funds. If small and medium-sized listed companies issue CBs publicly, they must submit reports to the Financial Supervisory Service and undergo credit rating evaluations, which require considerable time. An investment banking (IB) industry official pointed out, "Many companies go public (IPO) to raise funds smoothly," adding, "If regulations increase on fundraising, the utility value of being listed decreases."
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