Recently, as the Korea Exchange (KRX) designated a slew of penny stocks priced under 1,000 won and listed firms that fell short of market capitalization requirements as issues under management, the fallout produced the first case of an Event of Default (EOD) on a convertible bond (CB). An EOD is a measure that allows creditors to demand early repayment of principal and interest before maturity when the debtor's credit risk has increased, effectively meaning the borrower has entered default.
According to the Financial Supervisory Service's electronic disclosure system on the 19th, Hyungji Global(308100) said it failed to pay 5,522.74 million won in principal and interest on corporate bonds on the 14th. The amount combines 5 billion won in principal and 522.74 million won in interest, equal to 9.23% of its equity capital.
The unpaid instrument is the 11th tranche of convertible bonds (CB) issued on Sept. 29 last year. Once the issue was placed under management, grounds arose for a CB EOD, triggering a wave of early repayment demands that caused the situation.
The benefit of time is the legal right that allows the CB issuer, that is, the debtor, to defer repayment of principal and interest until maturity. But when the issuer's credit risk surfaces, this right is stripped, and the creditor may demand immediate early repayment of the full principal and interest. Such EOD conditions are usually specified as special provisions in CB issuance contracts.
The ignition point of this EOD case is the tougher listing maintenance requirements. KOSDAQ-listed Hyungji Global was designated an issue under management on the 13th because it was a penny stock under 1,000 won and had a market capitalization under 20 billion won. The authorities' tighter listing maintenance standards were the direct cause.
Similar cases are likely to surge going forward. As delisting criteria were raised, many corporations were designated as issues under management not only on the KOSDAQ market but also on the Korea Exchange's main board due to penny stock status and failure to meet market capitalization requirements.
In the investment industry, being designated as an issue under management does not automatically trigger an EOD, but weak share prices are generally seen as a signal that the business prospects of the corporation have deteriorated.
Kang So-hyeon, head of the capital markets division at the Korea Capital Market Institute, said, "The reason for being designated as an issue under management matters," adding, "Because issues are designated under management when they meet delisting criteria or, even if not immediately delisted, have grounds for it, the likelihood of default at these corporations will be higher than at other corporations."
Kang added, "Falling under penny stock status or below market capitalization is one variable, so more important than just that is the cause of the lower market capitalization."
Meanwhile, Hyungji Global said it plans to negotiate adjustments with bondholders on the repayment schedule and other matters.