Taekwang Industrial has completely scrapped its plan to issue exchangeable bonds (EB) backed by treasury shares. The company had pursued large-scale fundraising using treasury shares to restructure its businesses, including acquiring Aekyung Industrial and the Marriott Hotel, but criticism intensified that it undermines shareholder value after the passage of the Commercial Act amendment bill. In line with the government's policy push to mandate the retirement of treasury shares, it decided for now not to touch its treasury shares.
On the 24th, Taekwang Industrial said it held a board meeting in the morning and decided to cancel the decision, first disclosed on June 27, to issue exchangeable bonds and dispose of treasury shares. Taekwang Industrial had planned to issue 318.6 billion won in privately placed exchangeable bonds, with all its treasury shares (24.41% equity stake) as the exchange underlying.
An exchangeable bond is a bond that grants the right to exchange for treasury shares held by the issuer or shares of an affiliate. Bondholders can receive interest until maturity like a regular bond, or, if the price of the exchange underlying rises, they can switch to shares before maturity and sell to realize gains.
Previously, Taekwang Industrial granted exchangeable bondholders the right to convert into Taekwang Industrial shares at 1,172,251 won per share. The interest rate is 0%, so there is no interest earned from holding the bond. It is effectively an investment that yields a profit only if converted into shares and sold.
As its core business performance deteriorated amid a slump in the petrochemical sector, Taekwang Industrial had planned to issue exchangeable bonds to raise funds for portfolio restructuring. Since 2022, Taekwang Industrial has logged operating losses for three consecutive years (104.5 billion won → 99.4 billion won → 27.2 billion won). With cumulative operating losses reaching 58 billion won in the third quarter this year, a fourth straight year of operating deficits appears certain.
To expand its business, it signed definitive agreements to acquire the Namdaemun Marriott Hotel (285 billion won) and Aekyung Industrial (470 billion won). Recently, it also joined the bidding war for K Shipbuilding Co., Ltd., valued at 500 billion won. Combining cash and cash equivalents (504 billion won) with short-term financial products, total cash-like assets come to 1.3222 trillion won.
For corporations, issuing exchangeable bonds backed by treasury shares enables stable financing without issuing new shares. When bondholders exercise their rights, treasury shares that were locked up in the market are released into circulation, but the total number of listed shares does not change. By contrast, with convertible bonds (CB) and bonds with warrants (BW), new shares are issued when rights are exercised, increasing the total number of listed shares and diluting existing shareholders' equity.
Treasury-share-backed exchangeable bonds can also be handed to friendly parties and used as a takeover defense. While corporations have no voting rights on treasury shares they hold, those shares are transferred to outside investors through exchangeable bonds, and when rights are exercised, voting rights are restored. From the company's perspective, it can secure cash while transferring shares to friendly parties as a means of defending management control.
However, amid a fierce backlash from shareholders claiming damage to shareholder value and the government's policy stance of pushing for mandatory retirement of treasury shares, the company ultimately canceled the exchangeable bond issuance. The current administration is seeking to pass within the year the third Commercial Act amendment bill, which includes mandatory retirement of treasury shares. Retiring treasury shares reduces the number of shares outstanding and lifts share value. Truston Asset Management, the No. 2 shareholder of Taekwang Industrial, filed for an injunction to prohibit the exchangeable bond issuance but withdrew it on the morning of the same day.
The company said, "We judged it appropriate to withdraw the decision to dispose of treasury shares in light of the government's policy stance on retiring treasury shares and the need to protect shareholder value."
Meanwhile, there are concerns that if mandatory retirement of treasury shares is implemented when viable takeover defense tools are lacking, management disputes could become more frequent. In a report titled "Study on the problems of mandatory retirement of treasury shares" in Sep., the Korea Chamber of Commerce and Industry noted that forcing retirement of treasury shares, which have been used in diverse ways for employee compensation, strategic alliances and financial restructuring, would narrow corporations' options. It also said companies could be left defenseless against attacks by foreign hedge funds because they would be unable to use treasury shares as a takeover defense.