The domestic shipping company HMM plans to redeem a perpetual bond worth 720 billion won early this month. This is the last perpetual bond held by its major shareholders, the Industrial Bank of Korea and the Korea Maritime Promotion Corporation. There are concerns in the market that converting this into equity could raise these major shareholders' equity stake in HMM to nearly 72%, which may act as an obstacle to the sale.
According to the financial sector and shipping industry sources on the 2nd, HMM is reportedly in the process of an early redemption (call option) for the 720 billion won convertible bond (CB). This CB was issued in April 2020 as a 30-year perpetual bond, with the Industrial Bank and the Korea Maritime Promotion Corporation each purchasing half (360 billion won).
Although there are 25 years until maturity, HMM is pushing for early redemption to reduce interest expense. This CB contains a step-up clause that increases the interest rate after a specified period. The interest rate for this CB is 3% per year for the first five years from the date of issuance, but in the sixth year, it will increase by 3 percentage points to 6%. Subsequently, it will rise by 0.25 percentage points each year, with a maximum interest rate of 10% attainable. This month marks the fifth anniversary of the CB issuance. Starting next month, HMM will need to pay the Industrial Bank and the Korea Maritime Promotion Corporation interest at a rate of 6%.
Given that HMM has sufficient liquidity, there is no reason to keep the CB at a high interest rate. As of the third quarter of last year, HMM's cash and cash-equivalent assets amounted to 14.3 trillion won. Last year, under separate standards, it recorded sales of 11.51 trillion won, operating profits of 3.49 trillion won, and net profits of 3.67 trillion won. It is not difficult for the company to redeem the 760 billion won early.
Once this CB early redemption is completed, all perpetual bonds held by these major shareholders will be redeemed. This resolves the issue of the 3.5 trillion won perpetual bond, which had been cited as a negative factor for HMM’s stock price. HMM faced issues regarding the redemption of perpetual bonds a total of eight times since June 2021.
If HMM exercises the call option, the Industrial Bank and the Korea Maritime Promotion Corporation are expected to receive a stock conversion. The stock conversion price for HMM's CB is 5,000 won per share. Considering that HMM's stock price was 20,550 won at that time, they will be able to secure HMM shares at a 25% discount. Previously, when HMM exercised the CB call option, both the Industrial Bank and the Korea Maritime Promotion Corporation converted their holdings into stock.
In this case, the equity stake of the Industrial Bank and the Korea Maritime Promotion Corporation will increase, potentially creating obstacles for the sale of HMM. Currently, the equity stake held by the Industrial Bank and the Korea Maritime Promotion Corporation in HMM is 67.05%. If this CB is converted into equity, their stake will rise to 71.68% (36.02% for the Industrial Bank and 35.67% for the Korea Maritime Promotion Corporation). The market expects that the Industrial Bank will seek to resell HMM in the second half of this year or early next year. There is a need to reduce the equity stake by that time. It is reported that Harim Group, which was selected as a preferred bidder in the sale conducted last year, ultimately backed out due to an inability to narrow differences with the major shareholders over management rights.
Some industry insiders have suggested that HMM may lower its equity stake by purchasing shares from major shareholders. As part of its value-up strategy, HMM decided to repurchase and retire up to 2 trillion won in its own shares within the year.
An investment banking industry source noted, "After the last perpetual bond redemption is complete this month, HMM's share repurchase is expected to proceed sequentially."