Korea Investment & Securities Co. and Eugene Investment & Securities recently decided to each acquire 50 billion won of exchangeable bonds (EB) to be issued by Kolon Industries. As the share price of Woori Financial Group it holds rose, Kolon Industries issued EBs to move ahead with stock securitization.
On the 24th, according to the investment industry, Kolon Industries recently decided to issue 100 billion won in EBs. Of the 2.1% equity in Woori Financial Group held by the company, 0.3% is subject to exchange, and Korea Investment & Securities Co. and Eugene Investment & Securities, which invested in the EBs, can exchange the bonds for shares starting Mar. 3.
These EBs were issued on terms quite favorable to the issuer (Kolon Industries). In bond form, the company pays investors no interest at all. Both the coupon rate and the yield to maturity are 0%.
In particular, the exchange price was set at 45,852 won, higher than the share price at the time of issuance. It carries a significant premium, priced at an 18% markup from the reference share price at the time the EBs were issued.
Conversely, this can be interpreted as terms not particularly favorable to Korea Investment & Securities Co. and Eugene Investment & Securities, which are acquiring the EBs. Although the two securities firms said they are betting on a rise in the exchange underlying's share price, the expected return would be much higher if they directly bought Woori Financial Group shares on the market. As of the 23rd, Woori Financial Group shares were at 40,400 won.
However, securities firms can expect other added effects by investing in these EBs. First, securities firms can sell down (selldown) securitized products such as EBs to other institutional investors like insurers or pension funds, or to individual investors through retail channels, to earn fee income.
The Woori Financial Group-based EBs issued by Kolon Industries were privately placed, making retail-channel sales to individual investors difficult, but demand among institutional investors for securitized products such as EBs issued by companies listed on the Korea Exchange is said to be quite strong recently.
Some also say these are securitized products reflecting the typical "issuer-advantage" structure that appears in a buoyant stock market. In the current market environment, as securities firms wage an "sales war" to secure more client companies, funding is often arranged on terms favorable to the issuer.
A person in the capital markets industry said, "When the market is strong, the issuer holds the initiative," and added, "Even if expected returns are not high, securities firms sometimes structure deals on terms the issuer wants to maintain good relationships and win other transactions."
Regarding this, Korea Investment & Securities Co. said, "Given the bond's characteristics, the downside is protected while benefiting from the upside of investing in shares," and added, "Even if Woori Financial Group's share price falls, at least the principal is guaranteed, and if the price rises, we can convert to shares and expect gains, which is why we decided to invest."
Meanwhile, Kolon Industries also holds equity in Hana Financial Group in addition to Woori Financial Group. The company acquired shares in Hana Financial Group (1.48%) and Woori Financial Group (2.06%) as "simple investments" starting in 2018 and 2019, respectively. Their book value is around 240 billion won each, but by recent market prices, the total exceeds 1 trillion won.
Kolon Industries decided to issue EBs to repay long-term loans from financial institutions bearing interest rates of about 4%–5% per year. Hwang Gyu-won, an analyst at Yuanta Securities Korea, said, "If Kolon Industries issues EBs using the equity it holds to reduce net debt with high interest costs, it could further increase corporate value."