Some listed companies are speeding up the issuance of exchangeable bonds (EB). With the new government expected to push for mandatory cancellation of treasury shares, they are taking proactive steps to liquidate treasury shares by issuing EBs. By issuing EBs backed by treasury shares to friendly parties, the company can secure cash while also acquiring favorable equity.
According to the Financial Supervisory Service's electronic disclosure system on the 9th, KOSPI-listed company SKC announced that it will issue EBs backed by its treasury shares by the end of last month. The permanent EB has a total scale of 310 billion won, and the exchange target is approximately 2.99 million treasury shares held by SKC. SKC stated that this funding will strengthen its financial soundness and accelerate new business.
SK Group holds a large amount of treasury shares. In particular, the holding company SK has treasury equity amounting to 25%. While emphasizing its commitment to a value-up policy at the group level, it has not formalized the cancellation of treasury shares, leading investors to express dissatisfaction. Amid this, SKC issued EBs.
Exchangeable bonds (EB) refer to bonds that give investors the right to exchange their bonds for shares (either treasury shares or shares of other companies) held by the issuing company. After a certain period, bondholders can exchange their held bonds for treasury shares held by the issuing company.
From the company’s perspective, it is a way to secure cash without canceling treasury shares. Since it is a method of giving up existing shares, there is no concern about dilution of equity due to the issuance of new shares. Furthermore, even if the treasury shares do not have voting rights, disposing of them to a third party revives the voting rights, allowing the issuing company to sell EBs backed by its treasury shares to friendly forces, including affiliates, to strengthen its control.
Last month, KOSPI-listed companies including SKC, SNT Holdings, SNT Dynamics, and LG CHEM initiated the issuance of large-scale EBs based on treasury shares. This month, Barunson announced its EB issuance plan on the 2nd. From the 13th of last month to the 2nd of this month, a total of 9 EB issuance announcements were made, while there were none during the same period last year.
Some analysts suggest that listed companies are proactively issuing EBs to dispose of treasury shares before the next government's regulations on treasury share cancellation are strengthened after the presidential election. The judgment is that cashing out through EBs is more advantageous than cancellation.
A source in the financial investment industry noted, "We cannot know all the circumstances of individual corporations," but added, "Domestic listed companies are attempting to dispose of treasury shares through exchangeable bonds before regulations on treasury share cancellation are issued, proactively securing funds and protecting management rights." The source further remarked, "In principle, treasury shares should be canceled, but the fact that there are not many practical means for domestic listed companies to defend management rights outside of utilizing treasury shares is also true."
Even before the implementation of the value-up policy last year, similar controversies arose. Some listed companies were accused of disposing of treasury shares via EBs to evade the disclosure obligations regarding their purpose and disposal plans for holding treasury shares. At that time, Nongshim announced it would dispose of its entire treasury share holdings via EBs for the first time in 18 years, drawing criticism for circumventing regulations.
There are also cases where treasury shares are being transferred to the largest shareholders. In April, SOLUM announced it would sell 1.18 million treasury shares to its largest shareholder, CEO Jeon Seong-ho, leading to controversy.
At that time, the company stated it was to ensure responsible management from the largest shareholder; however, as it became known that the treasury shares would be transferred at a price lower than the acquisition cost, it was embroiled in a controversy over embezzlement. Ultimately, it corrected the announcement last month, stating it would cancel all treasury shares.
There are movements to sell treasury shares within the same affiliates as well. When treasury shares are sold to a third party, the voting rights are revived and can be used for management rights defense. KOSPI-listed SAJODAERIM announced last month that it would sell about half of its treasury shares to its affiliates, stating it aims to secure operating funds and improve its financial structure.
A professor of business management, who requested anonymity, commented, "Treasury shares are company assets, hence do not grant voting rights," and added, "As the obligation for cancellation is imminent, it goes against shareholder value for management to increase friendly equity with treasury shares that are not their own investments."