Successful Investor Recruitment Backed by CJ CGV Guarantee
Financial Improvement Recognized Despite Partial Paid-in Capital Increase
CJ CGV has successfully refinanced the perpetual bonds (hybrid capital securities) issued by its Turkish subsidiary. With growing expectations for financial structure improvement following a paid-in capital increase (including in-kind contributions) worth about 1 trillion KRW, there are forecasts that refinancing of borrowings or new fund raising will proceed smoothly. However, the halt on the in-kind contribution of CJ OliveNetworks shares is acting as a variable in CJ CGV's financial improvement plan.
According to the investment banking (IB) industry on the 30th, CJ CGV's overseas subsidiary in Turkey, Mars (MARS SINEMA TOURISM AND SPORTS FACILITIES MANAGEMENT INC.), recently issued perpetual bonds worth 100 billion KRW. The hybrid securities issued by CJ CGV have a maturity of 30 years, and the issuing company can exercise a call option (early redemption option) to redeem early after 2 years from issuance. Although the call option is not mandatory, if early redemption is not made after 2 years, the issuer must pay significantly increased interest to investors.
CJ CGV reissued perpetual bonds to early redeem the 30-year maturity perpetual bonds issued 2 years ago. Since Mars itself does not have the capability to issue bonds, the parent company CJ CGV provided a guarantee for the perpetual bonds. This contract means that if Mars fails to redeem the perpetual bonds, CJ CGV will repay the debt on its behalf. Thanks to CJ CGV's guarantee, the Turkish subsidiary succeeded in refinancing the perpetual bonds.
The success of the perpetual bond refinancing is interpreted as benefiting CJ CGV's financial improvement. CJ CGV recently secured 420 billion KRW through a shareholder rights offering. However, the plan for the group holding company CJ to contribute 100% of CJ OliveNetworks shares as an in-kind contribution has been delayed due to a court injunction. The court ruled against the in-kind contribution, stating that the valuation of CJ OliveNetworks shares was overestimated.
CJ has appealed to the court, but it is uncertain whether CJ CGV will be able to receive the contribution as originally planned. While it is likely that CJ Group will apply for re-approval of the contribution by lowering the valuation of CJ OliveNetworks shares, it is uncertain whether CJ will accept the court's judgment and reduce the share value.
Kim Hee-jae, an analyst at Daishin Securities, said, "The in-kind contribution price may be somewhat adjusted downward, but the possibility of the contribution itself being canceled is small," and analyzed, "Once the capital increase and in-kind contribution are completed, CJ CGV's debt ratio, which was close to 1050%, will drop to 370%, greatly improving the financial structure." He also predicted, "Excluding leases accounted for as liabilities in accounting, CJ CGV's actual debt ratio could fall to 140%."
Although it is a partial paid-in capital increase, the success in improving the financial structure is expected to mean there will be no major difficulties in borrowing fund raising for some time. An IB industry official said, "Although the stock price fell significantly due to the paid-in capital increase that accepted large-scale equity dilution, the financial structure improvement will lead to credit rating improvement," and added, "Since it showed CJ Group's willingness and capacity to support CJ CGV, future borrowing fund raising is expected to proceed smoothly without major obstacles."
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