The coronavirus fear is increasing financial burdens on listed South Korean venture firms as they are facing more calls for cash redemption from investors.
Investors in firms listed on Korea’s development bourse Kosdaq have cashed out their combined 361.3 billion won ($303.4 million) investment in mezzanine bonds -- convertible bonds and bond warrants -- from January until Friday, prior to their due maturity date, according to regulatory filings.
This marked a 48.4 percent increase on-year, data showed.
It indicates that more mezzanine investors in Kosdaq-listed firms this year chose to redeem their investment, instead of obtaining new shares in hopes of their growth or waiting until maturity.
The trend stems from investors’ worries about the bearish stock market, as the coronavirus epidemic is causing disruption in the financial market globally. Since January, the Kosdaq index has fallen 4 percent.
Clinical stage gene therapy developer Helixmith is one example. In response to calls for a 55 billion won withdrawal of the convertible bond investment in February, the biotechnology firm borrowed the corresponding amount from NH Investment & Securities. It later in February raised 80 billion won capital, mostly to repay its short-term debt.
Through the refinancing effort, the conversion price of each share shrank to less than one-third, compared to the earlier batch of fundraising two years before.
Such refinancing will dilute the value of outstanding shares. Otherwise, firms might use up their own resources to reimburse for capital flight, causing financial pressure.
Either way, investors’ withdrawal attempts are a cause for concern, Yoon Hyuk-jin, an analyst at SK Securities, wrote in a recent note.
This is just the beginning, he added, as more convertible bonds are expecting to mature and capital outflow is likely at the moment of, or even before maturity due to bad market conditions.
“Investors should be cautious of companies whose convertible bonds are about to mature,” Yoon said, adding there were 283 batches of convertible bonds of Kosdaq-listed firms that have yet to reach maturity.
Kosdaq-listed firms issued 4 trillion won worth of convertible bonds solely in 2018, according to SK Securities.
As for the reason behind the mezzanine popularity, Yoon cited the launch of the government initiative in April 2018 to encourage more investments in venture firms by creating more “Kosdaq venture funds.”
Convertible bonds are just part of this.
Korea has issued more mezzanine instruments than ever. According to the Korea Securities Depository, the total value of registered mezzanines came to 5.1 trillion won in 2019, up 20.2 percent on-year. The figure in 2019 jumped 2.5 times in four years.
By Son Ji-hyoung (firstname.lastname@example.org