L&F, a company specializing in secondary battery cathode materials, announced that it will issue $300 million in detachable bonds (BW) through a preferential allocation to shareholders followed by a public offering. Typically, BWs are issued privately, so L&F's decision has garnered market attention. Analysts suggest that L&F, which has faced difficulties attracting private investors, may be reaching out to existing shareholders ahead of next month's $100 million convertible bond (CB) put option exercise. The company faced resistance from shareholders when deciding to conduct a capital increase through the issuance of new shares, so after much deliberation, it chose to issue BWs in a manner prioritizing existing shareholders.
The exercise price of the new shares for this BW is $52, which is above the current stock price ($48.95 as of June 18). Strong potential for an increase in the stock price is necessary to incentivize existing shareholders to participate. Recently, Goldman Sachs presented an investment opinion on L&F as 'sell', slashing its target price from $80 to $40, and if the stock price continues to struggle, the company may face a dual financial crisis from CBs and BWs.
According to the Financial Supervisory Service, which reported on the 20th, the $300 million BBW issued by L&F on the 16th has a maturity of five years, with a coupon rate and maturity interest rate of 1.0% and 3.0%, respectively. After offering to existing shareholders, if there are any unsubscribed shares, they will be offered to general investors. Any remaining unsubscribed shares will be divided among four securities firms.
The company stated that it will use $200 million of the funds raised from the issuance of BWs for securing production capacity, including the site for lithium iron phosphate (LFP) cathode materials, factory construction, and machinery and equipment. The remaining $100 million is slated for facility and operational funds.
A detachable BW allows the new warrant and bond to be traded separately and independently. When holding only the bond, investors can expect a guaranteed principal at maturity with an annual compound interest income of 3%. Simultaneously, they can realize capital gains through exercising the new warrants if the stock price rises in the future. L&F plans to accelerate its LFP business through this funding.
The problem is that the investment appeal for existing shareholders is assessed as limited. This is due to the bond yield of the BW being capped at 3% for a five-year term. Additionally, there are concerns that the value of the new warrants will be low since the exercise price is above the current stock price, leading to uncertainties about the potential increase in stock prices. Ultimately, the company needs to drive the stock price up through the new LFP business, but it is currently at the stage of securing funds for production facilities, which is a long way off.
In the securities industry, there are concerns about L&F’s potential financial difficulties, compounded by skepticism regarding the success of its new business. Although the secondary battery sector is promising, significant profit generation is unlikely in the short term due to reinvestment burdens. One secondary battery sector analyst noted, “Entering the LFP cathode material business under the U.S. strategy to move away from China is positive from a directional standpoint,” but added that “even at the fastest production, it won’t be until 2027, and with the company’s asset and financial conditions deteriorating, there are widespread concerns about default risks.” L&F has recorded operating losses and net losses from the first quarter of 2023 to this year.
Recently, Goldman Sachs downgraded its investment opinion on L&F to 'sell' and drastically lowered its target price from $80 to $40. Goldman Sachs pointed out that L&F is overly reliant on LG Energy Solution for more than 80% of its sales, indicating excessive concentration on a single customer.
Goldman Sachs predicts that L&F's debt ratio will reach 376% next year, and the interest coverage ratio (operating income/interest expense) is expected to be just 0.3%. They explain that the current earnings will not be enough to cover the interest.
In July, the exercise period for the put option of the 6th CB issued last December will also arrive. The total is $100 million, with a conversion price of $103.974. The current stock price is at half of the conversion price, making the likelihood of conversion to shares virtually low, leading investors to likely demand early redemption.
Given the situation, the financial investment industry interprets this BW issuance as a way for L&F to extend a hand to ordinary shareholders. This is due to the fact that the issuance of BWs in a preferential public offering manner is not commonly practiced in the industry.
A source in the investment industry said, “The private placement method is preferred because it is advantageous in terms of procedures and expenses,” and noted that “public offering methods tend to involve complicated procedures targeting an unspecified large number of people, and various costs such as underwriting fees are typically set at high rates, making it a method chosen in situations where fundraising is difficult.
The underwriting fee rate for unsubscribed shares (12%) is also high. A source in the underwriting finance industry explained that “the underwriting fee rate indicates the risk burden of raising funds,” and added, “the underwriting fee rate appears to have been set considerably high due to the poor outlook for the secondary battery sector.
A representative from L&F stated, “This will play an important role in enhancing capital expansion and financial soundness, as well as securing growth momentum through product portfolio expansion,” and added, “we plan to promote improvements in our financial structure through proactive stock price support activities even after the issuance of BWs.