The Financial Supervisory Service put the brakes on Kwangdong Pharmaceutical's decision to issue exchangeable bonds (EBs) backed by treasury shares. The agency applied tougher disclosure standards related to EB issuance starting on the 20th, and this was the first correction order under the revised rules.
On the 23rd, the Financial Supervisory Service imposed a correction order on two reports of key matters (decision to dispose of treasury shares and decision to issue exchangeable bonds) that Kwangdong Pharmaceutical submitted on the 20th. It was the first time since July, after Taekwang Industrial, that the Financial Supervisory Service put the brakes on an EB issuance disclosure.
The Financial Supervisory Service issued the correction order because it judged that Kwangdong Pharmaceutical's disclosure of its EB issuance plan did not meet the strengthened standards. The Financial Supervisory Service noted, "Even though we strengthened disclosure standards so that corporations fully review the use of treasury shares while also providing investors with information necessary for investment decisions, companies have prepared (reports) in a way that does not align with that intent."
Specifically, the Financial Supervisory Service found that the content recorded under "Other matters for reference in investment decisions" did not comply with the Regulation on Issuance, Public Disclosure, etc. of Securities.
Under the revised disclosure standards of the Financial Supervisory Service, corporations must specifically state in the matters for reference in investment decisions: ▲ the reason for choosing to issue exchangeable bonds backed by treasury shares instead of other financing methods ▲ the review of the appropriateness of the issuance timing ▲ the impact on existing shareholder interests, among other details.
However, the Financial Supervisory Service judged that Kwangdong Pharmaceutical did not adequately explain why it is using treasury shares despite having other ways to raise funds.
Earlier, on the 20th, Kwangdong Pharmaceutical disclosed that it would issue zero-coupon EBs to Daishin Securities Co. backed by treasury shares worth 25 billion won. The exchange target is 3,793,626 treasury shares held by Kwangdong Pharmaceutical, equivalent to 7.24% of total outstanding shares. The exchange price was set at 6,590 won per share.
Regarding the EB issuance using treasury shares, Kwangdong Pharmaceutical said, "We have raised funds through borrowing from financial institutions and disposal of financial products we hold, but the burden of existing financing methods has increased, such as the rise in borrowings each fiscal year," adding, "We decided to issue exchangeable bonds backed by treasury shares, which offer significant savings in issuance and financing costs compared to other financing methods."
The point is that it is difficult to pass the Financial Supervisory Service's screening threshold with an explanation that treasury shares are being used as a financing tool simply to reduce borrowing burdens.
Kwangdong Pharmaceutical also added that support through EB issuance was unavoidable as the early redemption (put option) period for convertible bonds (CBs) issued by affiliate Precision Biosensor had arrived, but it appears the Financial Supervisory Service likewise judged this reason insufficient to justify issuing EBs backed by treasury shares.
The Financial Supervisory Service also explained, "The company wrote that there were no plans for resale after issuing EBs, but it was confirmed that this was not true."
Meanwhile, the Financial Supervisory Service is closely reviewing the plan by Tes, a semiconductor manufacturing equipment maker, which disclosed an EB issuance the day before. Tes said it would issue EBs backed by 15.7 billion won worth of treasury shares the day before. The exchange target is 300,000 treasury shares held by Tes, equal to 1.5% of total outstanding shares.
Tes likewise said it was "a decision to minimize financing costs and maintain financial soundness," adding that "most of the other company shares we hold are unlisted and have low marketability, so we chose treasury share EBs." It also emphasized the timing as optimal for EB issuance by highlighting the entry point into the semiconductor "supercycle."