This article was displayed on the ChosunBiz MoneyMove (MM) site at 5:44 p.m. on Nov. 26, 2025.
Meritz Securities decided on a third-party allocation paid-in capital increase of 500 billion won to bolster capital. On the surface, the paid-in capital increase is structured so an outside investor acquires conversion preferred shares (CPS) and injects capital, but in reality it is debt-like capital procurement backed by the credit of Meritz Financial Group. Nevertheless, Meritz Securities' accounting liabilities do not increase. That is why it is seen as a clever two-birds-one-stone measure.
On the 26th, investment banking (IB) industry sources said Meritz Securities announced the day before that it would carry out a third-party allocation paid-in capital increase of 500 billion won. It will issue 38,750,679 nonvoting CPS. The issue price is 12,903 won per share. The third-party allottee is a special purpose company (SPC) unrelated to Meritz, NexRise First. The SPC was established by the securities firm that underwrote this CPS.
NexRise First will purchase all CPS issued by Meritz Securities and pay 500 billion won to Meritz Securities in exchange. From Meritz Securities' perspective, cash flows in and its accounting equity increases. Afterward, NexRise First will use Meritz Securities' CPS as underlying assets to issue securitized instruments such as ABCP, ABS and revenue-linked securities and sell them to institutional investors such as insurers and pension funds (sell-down).
The core of the contract is the put option that Meritz Financial Group grants to SPC NexRise First. SPC investors have the right to sell all or part of the CPS back to Meritz Financial Group at a predetermined price between Oct. 2027 and Nov. 2030. The exercise price is confidential, but is usually set by adding an internal rate of return (IRR) to the principal.
CPS are preferred shares with a conversion right, but the conversion function appears to have no practical meaning in this deal. Meritz Securities is unlisted and is a wholly owned subsidiary 100% owned by Meritz Financial Group. If a CPS holder chooses conversion to common stock, they would obtain a minority stake in Meritz Securities, but such minority stakes in an unlisted company offer little opportunity to secure control or participate in decision-making and have limited liquidity. Unless listing plans and expected company valuation are presented concretely, it is difficult to realize an increase in equity value through conversion.
On the other hand, if they exercise the put option, Meritz Financial Group will return the investment with interest. For CPS investors, exercising the put option to get their money back is preferable to holding equity in the unlisted securities firm Meritz Securities.
Meritz Securities' paid-in capital increase differs from the way other securities firms have recently bolstered capital. Korea Investment Holdings last year carried out an ordinary share paid-in capital increase of 900 billion won that its parent company, Korea Investment Holdings, fully subscribed to. It was a traditional equity recapitalization in which the parent directly injected cash to strengthen the subsidiary's capital.
Daishin Securities Co. and Kiwoom Securities issued redeemable convertible preferred stock (RCPS) to push their equity above the 3 trillion won level and meet the requirements for a comprehensive securities company license. They designed RCPS in a structure where the issuer and investors deal directly. Meritz, however, allocated CPS to an SPC as a third-party allotment and crafted a complex structure in which Meritz Financial Group provides a put option to the SPC.
The reason Meritz Securities did not receive direct capital support from the holding company first appears related to the holding company's current financial structure. If, like Korea Investment Holdings, the parent has abundant cash-like assets and a low double leverage ratio (an indicator showing how large the funds obtained through borrowing to hold subsidiary shares are relative to its equity), the parent company can directly subscribe to a subsidiary's ordinary share paid-in capital increase.
But Meritz Financial Group's double leverage ratio is known to be about 120%, higher than the financial holding company average (low 110% range). In addition, financial burdens have accumulated due to subsidiary equity investments, payment guarantees and purchases of new capital instruments, so directly investing 500 billion won could pressure capital adequacy.
Choosing CPS rather than RCPS like Daishin Securities Co. or Kiwoom Securities is interpreted as an accounting choice. Under international accounting standards, when judging liability character, it is important to determine whether there is a contractual obligation to pay cash to the issuer.
RCPS are typically designed so the redemption obligation favors investors because investors have the right to demand repayment from the issuer. Therefore, depending on the structure, they often have a dual nature mixing liability and equity. By contrast, CPS that have no redemption obligation and convert only to common stock are easier to classify as full equity in the issuer's accounting because there is no cash redemption obligation.
Although there is a put option, the redemption obligation rests with Meritz Financial Group, so Meritz Securities does not have a debt-like contract. Accounting is done at each corporate entity level, so Meritz Securities recognizes capital without a redemption obligation, while Meritz Financial Group reflects a separate guarantee obligation.
An IB industry official said, "This paid-in capital increase is a structure that imposes no burden on Meritz Securities," and noted, "From investors' perspective, they can receive stable dividends backed by the holding company's credit, so both Meritz and investors can 'win-win.'"
Coincidentally, this paid-in capital increase has a structure very similar to the 3 trillion won investment Meritz Securities made against SK Innovation in September.
Meritz Securities fully subscribed to 3 trillion won worth of CPS issued by SK Innovation's power subsidiaries, and SK Innovation provided its 100% stakes in Narae Energy Service and Yeoju Energy Service as collateral. SK Innovation can exercise a call option to repurchase the stakes held by Meritz.