Hyosung Chemical's subsidiary, Hyosung Chemical, fell into complete capital erosion as of the end of last year, and transactions of both stocks and bonds were suspended as of the 4th. Hyosung Chemical mentioned that it had resolved the capital erosion reason by selling its special gas division (Hyosung Neochem) to its affiliate, Hyosung TNC, for 920 billion won, indicating that transactions would soon resume.
However, as a conglomerate with sales exceeding 2 trillion won was suspended due to capital erosion, investor confidence has significantly dropped. The disclosure of this fact took place on February 28th, just before the March 1st holiday, and suddenly, investors whose money was locked up were caught off guard.
The Korea Exchange's Securities Market Division stated that if Hyosung Chemical, which disclosed the total capital erosion, fails to submit documentation proving the resolution of this reason by the deadline for submitting the business report, which is March 31st, it may fall under the criteria for delisting.
Hyosung Chemical's capital erosion was, in fact, anticipated. After posting a net loss of 408.8 billion won for the year 2022, it recorded 346.9 billion won in 2023, with a net loss of 225.1 billion won until the third quarter of last year. In contrast, as of the end of September last year, the total capital was only 32.5 billion won. With unfavorable market conditions making a return to profitability impossible and considering financial costs and depreciation expenses, which amount to around 100 billion won per quarter, capital erosion was inevitable by year-end.
Of course, the company did its best to improve its financial structure. It sold its valuable special gas division for 920 billion won to its affiliate, Hyosung TNC. However, as the final payment extended into January, a temporary complete capital erosion could not be avoided.
A financial industry official noted, "The company’s finance team should have recognized this fact and actively communicated with market participants right away," adding, "Many investors likely suffered losses due to the sudden transaction suspension."
A more significant issue is that it's unclear how long the transaction suspension due to capital erosion will last. The exchange stated that if Hyosung Chemical submits documentation proving the resolution of the capital erosion, it will review whether it meets the substantial examination criteria for listing. During this period, investors' funds will be inevitably locked.
The repercussions of the transaction suspension are expected to be considerable. NICE Credit Evaluation stated on the 4th, "We believe that Hyosung Chemical's complete capital erosion status has likely been resolved," but also noted, "During the substantive examination of listing qualifications, access to capital markets will inevitably decline." Furthermore, they pointed out that "uncertainties regarding the refinancing of corporate bonds and short-term borrowings will increase during this period" and that "confirmation of the company's liquidity response ability is necessary."
In fact, Hyosung Chemical had planned to issue corporate bonds worth 50 billion won this year. However, after the transaction suspension, the unavoidable decline in investor sentiment has led to forecasts that issuing corporate bonds may not be easy. If the company’s financing environment deteriorates, concerns over a liquidity crunch will continue.
The company stated, "We will do our best to communicate with and clarify to the Korea Exchange to resume transactions." As of December 31, 2024, Hyosung Chemical's total capital is minus (-) 68 billion won, but according to the merger termination report disclosed on the same day, total capital increased to 634.8 billion won following the sale of the special gas division.
Even if transactions resume, there are concerns that Hyosung Chemical will find it difficult to become profitable right away. Hyosung Chemical continues to incur losses due to oversupply and low-price competition for its main product, polypropylene (PP), as well as rising shipping costs. Recently, Korea Credit Rating Agency downgraded the credit rating outlook for Hyosung Chemical's unguaranteed corporate bonds from "stable" to "negative," analyzing, "As the PP supply-demand environment worsens, profitability recovery is expected to be difficult in the short term."