Daehan Optical Communications, 10th CB Conversion Price Hits Lowest... Overhang Concerns Rise

"Convertible Bonds Equivalent to 28% of Total Shares Including Rights Offering Volume"
Large Gap Between Conversion Price and Current Stock Price... Possibility of Redemption Demand
Cash Equivalents Only 10.5 Billion Won at End of Q3 Last Year

The conversion price of Daehan Optical Communications' 10th series convertible bonds (CB) has dropped to its lowest, raising concerns about overhang (potential large-scale sell-off). This is because up to 28% of the total issued shares could be released into the market. Since Daehan Optical Communications is conducting a rights offering, the overhang issue is expected to persist for some time.

According to the Financial Supervisory Service's electronic disclosure system on the 9th, Daehan Optical Communications announced on the 7th of this month that the conversion price of the 10th series CB was adjusted from 1,221 KRW to 1,085 KRW. The reason for the adjustment was the decline in market price.

Daehan Optical Communications issued 23 billion KRW worth of 10th series CB in November 2023. The funds were intended for investment in and operation of a production plant in the United States. The coupon rate and maturity interest rate are 0% and 2%, respectively, with a maturity date of November 7, 2028. The subscribers were KB Securities, Kiwoom Securities, Kiwoom-Focus No.1 New Technology Business Investment Association, and KB-Suseong No.1 New Technology Business Investment Association.

Due to the adjustment of the conversion price, the number of shares that can be issued increased from 18,837,018 to 21,198,156 shares. This corresponds to 28.45% of the total issued shares of 74,511,166. The conversion request period for the 10th series CB is from November 7, last year, to October 7, 2028. Depending on the stock price situation, more than 28% of the total shares could be released into the market at any time.

Since there is a significant gap between the current stock price and the 10th series CB conversion price, there is also a possibility that investors may request redemption. Based on the closing price of the previous day, Daehan Optical Communications' stock price was 839 KRW. If CB investors demand redemption instead of conversion to shares, it could pose a burden on the company.

As of the end of the third quarter last year, Daehan Optical Communications recorded consolidated sales of 116.9 billion KRW and an operating loss of 16 billion KRW. Sales decreased by 19.57% compared to the same period last year, and the loss widened. During the same period, cash and cash equivalents decreased from 16 billion KRW to 10.5 billion KRW.

The overhang issue is expected to continue. Daehan Optical Communications is conducting a rights offering followed by a general public offering of forfeited shares. The issue price is 563 KRW, and 35 million shares will be issued. This corresponds to 46.97% of the total shares.