As Interest Rates Continue to Rise, LG Chem, SK Eco, LS Net, and Others Issue More EB
Cost Reduction Purpose... Advantage of Equity Recovery Possible When Financial Conditions Improve
As market interest rates continue to rise in the second half of the year, more companies are issuing exchangeable bonds (EB) using stakes in profitable affiliates or treasury shares. This is interpreted as a result of the advantage of raising necessary funds at relatively low interest rates immediately and later repurchasing the shares offered for exchange by repaying the principal and interest of the bonds when the situation improves.
According to the investment banking (IB) industry on the 25th, SK Ecoplant, LS Networks, and Fashion Group Hyungji simultaneously issued EBs on the 22nd. The amounts were 323.6 billion KRW, 25.6 billion KRW, and 1.8 billion KRW, respectively. Fashion Group Hyungji has repeatedly issued EBs several times in addition to this small-scale EB issuance. On the same day, JS Corporation also issued 10 billion KRW worth of EBs. TPC, Namu Technology, Namseong, Jinwoo Engineering, and others have also recently issued EBs to raise funds. Nine companies have issued EBs so far this month.
EBs are bonds that allow investors to convert them into shares of other companies or treasury shares held by the issuing company if the issuer fails to repay the principal and interest on time. Listed affiliate stocks that can be sold on the market or treasury shares of the issuer, if it is a listed company, are mainly used as exchange targets. Shares of unlisted companies are rarely used because they are difficult to liquidate immediately.
SK Ecoplant issued a 30-year perpetual EB with the option to extend the maturity continuously, offering common shares of Daewon Green Energy, an unlisted affiliate, as the exchange target. Daewon Green Energy is a waste disposal subsidiary acquired by SK Ecoplant. It was launched earlier this month by merging seven companies: Dosihwan-gyeong, JA Green, DDS, Saehan Environment, Green Environment Technology, and Imedion. Daewon Green Energy will undergo a capital reduction and then be split again into seven environmental subsidiaries.
An IB industry official said, "SK Ecoplant secured liquidity worth thousands of billions of won used for mergers and acquisitions (M&A) again by utilizing EB issuance, environmental affiliate mergers → capital reduction → spin-off," adding, "If SK Ecoplant succeeds in its ongoing initial public offering (IPO), it plans to repay the EB early with funds raised through new share issuance and reclaim the Daewon Green Energy shares used to secure liquidity."
Recently, LS Networks and JS Corporation used their treasury shares as exchange targets for EBs. Unlisted companies Fashion Group Hyungji and Jinwoo Engineering offered listed affiliates Kastel Bajak and JNTC as exchange targets, respectively. IS Holdings and Sejong Telecom, which issued 50 billion KRW worth of EBs in March and May, proposed their core affiliates IS Dongseo and investment stock Samsung Electronics common shares as exchange targets.
The reason for raising funds using core business subsidiaries or profitable investment stocks is a financing strategy to secure liquidity at a low cost without selling shares. Among the 35 EB issuances this year, 29 were raised at a 0% coupon rate, excluding six cases.
A bond market official said, "Except for one or two companies that issued EBs this year, most companies find it difficult to issue corporate bonds on their own or have to accept double-digit high interest rates even if they raise funds," adding, "There is an increasing attempt to save financing costs by offering shares as a kind of collateral as exchange targets."
LG Chem is also pushing to issue foreign currency EBs worth 2 billion USD (about 2.6 trillion KRW) to reduce financing costs. The exchange target is 3,694,824 common shares of LG Energy Solution, accounting for 1.9% of the total shares. LG Chem's international credit rating (BBB+) outlook changed from 'stable' to 'negative' due to sluggish petrochemical business and increased borrowings from battery investments. It is interpreted that LG Chem chose EB issuance due to rising foreign currency financing costs caused by market interest rate hikes and credit deterioration.
An IB industry official said, "Contrary to market expectations, as the upward trend in market interest rates continues in the second half, more companies are issuing EBs using their held shares," and predicted, "EB issuance by companies holding profitable listed stocks or treasury shares will continue to increase for some time."
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