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Cash-strapped companies embrace unfavorable conditions to attract money
By Anna J. Park
More mid-cap companies listed on the tech-heavy Kosdaq market have been opting to raise capital by issuing new stocks, as offering news shares is considered a way to secure cash with the least interest burden amid tightened global liquidity and soaring interest rates.
According to the electronic disclosure system operated by the Financial Supervisory Service (FSS), the number of Kosdaq-listed companies that announced plans last month to issue new shares has more than doubled to 13, from the 6 companies that did so during the same month last year. Most of the companies stated that they decided to issue new stocks to secure money for operating costs and debt payments.
This month alone, medical equipment company Sejong Medical, cable channel Aniplus and content company StudioDragon announced plans to issue new shares to raise capital worth 20 billion won ($14.5 million), 10 billion won and 3 billion won, respectively.
These companies know that raising capital by issuing new shares is a double-edged sword. It could be the most burden-free way in terms of interest costs for companies to raise money, but it could also wreak havoc on a firm's corporate value with the increased uncertainty put on stock prices. As a result, raising capital by issuing new stocks is often considered a last resort for many small- and mid-cap companies.
"In general, offering new stocks with shareholder priority is subject to a significant discount rate compared to normal stock prices, which becomes a big burden for a company's future stock price movements. The stock price tends to fall to near the price of the newly issued stock with these discount rates applied," a market watcher pointed out.
Although they are aware of this risk, more local Kosdaq-listed companies decided to raise necessary capital through this route, which reflects increased difficulties in securing liquidity via corporate bond issuances.
Even when companies decide to issue new stocks to raise capital, some of them end up reducing the targeted amount of capital due to a lack of investor interest and falling stock prices. Nine Kosdaq companies out of 11 that confirmed the offering of new stocks during September and October saw the total amount of capital to be raised through the stock issuance reduced, due to declining stock prices.
In the case that they do not want to burden their stock prices, companies could still attract capital by offering shares to a group of private investors. But as it has now become much harder to find external investors due to frozen investor sentiment, companies have been embracing unfavorable conditions with regards to issuing redeemable convertible preference shares (RCPS), which allow investors to redeem their shares from companies at a certain price, to secure necessary liquidity.
"Companies that continue to post poor performances do not have other options but to accept unfavorable conditions to attract money, because securing liquidity is directly related to their survival," a market insider said. "Some companies with serious solvency problems would not even be able to attempt to raise capital by offering new stocks, and they're most likely to face a crisis in the future. In the end, the only fundamental solution to these companies is to recover corporate value by improving their revenue."
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