[Why&Next] Despite Deteriorating Financial Structures... Why Has 'Large Corporations' Paid-in Capital Increase' Sharply Decreased?

LGD Only Large Corporation to Conduct Paid-in Capital Increase in First Half
Major Shareholders Reluctant to Inject Large Funds
Improving Financial Structure with 'Perpetual Bonds' Instead of Capital Increase

Despite the deterioration of corporate financial conditions, the paid-in capital increase market has significantly contracted. Large corporations and financial companies have been reluctant to conduct paid-in capital increases due to the heavy financial burden on major shareholders, leading to a sharp decline in the issuance scale of new shares by listed companies. Paid-in capital increases have become the exclusive domain of mid-sized companies. Large corporations and financial firms with worsening financial conditions are improving their financial structures by issuing hybrid capital securities (perpetual bonds), contingent convertible bonds (CoCo bonds), and subordinated bonds instead of capital increases. Although these three types of bonds carry high interest rates, they can be recognized as capital in whole or in part, making them alternatives to paid-in capital increases.

Only LGD Among Large Corporations Conducted Capital Increase in the First Half

According to the investment banking (IB) industry on the 1st, LG Display is the only listed company affiliated with a domestic large corporation that conducted a public paid-in capital increase in the first half of this year. LG Display carried out a paid-in capital increase worth 1.2925 trillion KRW in March as its performance and financial condition rapidly deteriorated. Compared to last year’s capital increases by Hanwha Ocean (1.4971 trillion KRW), Lotte Chemical (1.2155 trillion KRW), SK Innovation (1.1433 trillion KRW), CJ CGV (415.3 billion KRW), Hyundai GFB Holdings (363.4 billion KRW), OCI Holdings (330.7 billion KRW), and Hanwha Solutions (57.6 billion KRW), the number of paid-in capital increases by large listed companies has drastically decreased.

LG Display Paju Plant Panorama

As paid-in capital increases by large corporations declined, the total amount of new shares issued through paid-in capital increases by listed companies in the first half of this year was only 2.8 trillion KRW. This marks a significant reduction compared to the 8 trillion KRW range of paid-in capital increases conducted annually in 2022 and last year (2023). In 2021, the amount of new shares issued through paid-in capital increases reached 16.8 trillion KRW. The first half issuance amount has shrunk to about half of the average semiannual paid-in capital increase amount (5.55 trillion KRW) over the past three years.

Not only large corporate affiliates but also financial companies have refrained from paid-in capital increases. The only financial company to conduct a paid-in capital increase in the first half of this year was KDB Life Insurance. KDB Life Insurance raised 299 billion KRW for financial structure improvement with Korea Investment & Securities as the lead manager. The major shareholder, KDB Industrial Bank, fully funded the capital increase. Last year, Hana F&I and KDB Life Insurance conducted paid-in capital increases. There were no paid-in capital increases by financial companies in 2021 and 2022. The contraction of paid-in capital increases among financial companies has been ongoing for several years.

On the other hand, mid-sized companies have continued to conduct paid-in capital increases steadily. This year, companies such as Daehan Electric Wire (462.5 billion KRW), Iljin Electric (93.5 billion KRW), and SillaJen (103.2 billion KRW) improved their financial structures through paid-in capital increases. The total amount of paid-in capital increases by mid-sized companies excluding large corporations and financial firms in the first half of this year was about 1.5 trillion KRW, showing no significant increase or decrease compared to the average. Last year, the scale of paid-in capital increases by mid-sized companies was 2.7 trillion KRW.

An IB industry insider said, "For large corporations and financial companies, conducting a paid-in capital increase requires a large capital injection, and if the major shareholders do not invest funds proportional to their shareholding, other shareholders’ stakes increase, diluting the controlling interest in the company. For this reason, most large corporations and financial companies are clearly reluctant to conduct paid-in capital increases despite deteriorating financial structures."

Improving Finances with Perpetual Bonds Instead of Capital Increases

Since the beginning of this year, most large corporations and financial companies have improved their financial structures by issuing subordinated securities such as perpetual convertible bonds (CB) instead of paid-in capital increases. Although CBs are high-interest bonds, they are recognized as capital in accounting because of their long maturities and weaker repayment obligations compared to general bonds. Issuing CBs allows companies to improve their debt ratios without conducting capital increases.

Recently, SK On, an SK Group-affiliated secondary battery company, issued 500 billion KRW worth of perpetual bonds to improve its financial structure. Following this, Asiana Airlines issued 177 billion KRW in CBs to redeem CBs held by securities firms. It is reported that Korean Air, which is pursuing a merger with Asiana Airlines, has acquired all the CBs.

Additionally, companies such as Shinsegae Construction (650 billion KRW), SK Incheon Petrochem (460 billion KRW), Lotte Cultureworks (200 billion KRW), Meritz Financial Group (200 billion KRW), Meritz Securities (190 billion KRW), KB Real Estate Trust (170 billion KRW), Lotte Holdings (150 billion KRW), CJ Logistics (150 billion KRW), KB Securities (130 billion KRW), CJ CGV (120 billion KRW), and Hyosung Chemical (100 billion KRW) issued CBs in the first half of this year to improve their financial structures.

Financial companies have actively utilized CoCo bonds and subordinated bonds as alternatives to paid-in capital increases in addition to CBs. The five major financial holding companies?KB, Shinhan, Hana, Woori, NongHyup?and regional financial holding companies such as DGB and JB issued CoCo bonds to improve their capital adequacy ratios based on the Basel Committee on Banking Supervision (BIS) standards. Insurance companies like Hyundai Marine & Fire Insurance, Meritz Fire & Marine Insurance, Lotte Insurance, and Fubon Hyundai mainly issued subordinated bonds to enhance their Risk-Based Capital (RBC) ratios.

An IB industry insider forecasted, "Financial companies and large corporations with good credit ratings will continue to use CBs and similar instruments for financial structure improvement despite bearing somewhat higher interest rates, as these are cost-effective from a capital cost perspective. The paid-in capital increase market is likely to become entrenched mainly among companies whose credit ratings have deteriorated to the point where issuing subordinated bonds is difficult."