Kakao's exchangeable bond issue lures global investors

South Korea’s mobile platform giant Kakao Corp. is raising the price of shares to be converted from its exchangeable bond issue in Singapore on overwhelming investor demand. The company is set to issue 339.6 billion won ($300 million) worth of EBs in Singapore.

The company announced on Oct. 22 that the exchangeable price for the overseas private EBs will bump up from 450,713 won ($398) to 477,225 won ($421) apiece.

Exchangeable bonds give holders the option to exchange them for common shares. If the price is high, then they can be exchanged for fewer shares. As for Kakao, the number of exchangeable shares dropped from 753,407 to 711,552.

The newly set price is 135% higher than the company's closing price of 349,000 won on Oct. 22. The previous price offered a premium of 127.5%. EB investors forecast Kakao's shares to rise at least 35% from the current price.

The zero-coupon bonds will mature in April 2023, but EB investors can exchange them into Kakao shares between January 2021 and April 2023 to make profits.

Kakao is issuing exchangeable bonds to raise M&A funds that will help boost its platform and content businesses. And similarly, more companies are issuing zero-coupon exchangeable bonds to raise funds as companies see it as an opportunity to secure liquidity on the back of the stock market rebound.

For example, overseas institutional investors flocked to Kakao’s EB issuance assuming the company’s share price will follow a bullish trend next year. Kakao’s share price has risen 163.8% since bottoming out on Mar. 19.

According to the Financial Supervisory Service, a total of 17 listed companies including Kakao, KB Financial Group Inc., healthcare firm Binex Co., eco-friendly materials maker EcoPro Co. have already issued or plan to issue exchangeable bonds this year. Among them, 13 companies issued zero-coupon exchangeable bonds.

This is a notable increase from the same period last year when 10 companies issued exchangeable bonds, of which six issued zero-coupon EBs.

The stock market’s recovery has led to hiked share prices, prompting the rush to issue exchangeable bonds using treasury stocks. Earlier in June, KB Financial Group secured Carlyle Group as an investor to buy $200 million worth of exchangeable bonds.

The investment banking industry expects more companies to issue exchangeable bonds on the share price rebound. Also, they are exchanged with shares that are already held by the issuing company, which reduces the overhang concerns of convertible bonds or bonds with warrants. The exchangeable price is generally set higher than the market price, making it unlikely for the issuing company’s shares to spill into the market all at once.

Write to Jin-sung Kim and Geun-ho Im at jskim1028@hankyung.com
Danbee Lee edited this article.