“The paradox of the Commercial Act amendments”: As equity offerings become more burdensome, companies favor PRS and hybrid securities—could credit risks rise? [fn Market Watch]

[Financial News] As three rounds of amendments to the Commercial Act strengthen shareholder returns and protections for minority shareholders, companies’ approaches to raising funds are also changing. Analysts say that as companies increasingly favor alternative funding methods such as price return swaps (PRS) and hybrid securities over equity offerings, which dilute existing shareholders’ stakes, their potential repayment burdens could grow. They warn that regulatory changes intended to enhance shareholder value could paradoxically burden creditor protection and companies’ financial stability.
According to a report released on the 12th by NICE Investors Service, titled “Changes in Corporate Decision-Making and Key Credit Rating Considerations Following Commercial Act Amendments,” companies are increasingly favoring alternative funding methods such as PRS and hybrid securities as the procedural burden of raising equity capital, including through equity offerings, grows following the amendments. However, depending on their structure, these funding methods can entail repayment and settlement obligations, potentially increasing companies’ financial risks, the report said. It also raised the possibility that if companies’ ability to bolster capital through equity offerings is constrained, their reliance on borrowing and structured finance could increase, weighing on their creditworthiness.
In the report he co-authored with Kim Ga-yeong, head of the Credit Rating Criteria Office, Kang Won-gu, a senior researcher at NICE Investors Service, said, “The increase in decision-making and procedural considerations is also affecting companies’ financing methods.” He analyzed that “there is a growing preference for funding methods such as hybrid securities and PRS, which can minimize dilution of existing shareholders’ stakes, rather than equity offerings.”
The concern is that these funding methods could increase companies’ actual financial burden. Depending on the contract structure, PRS can entail settlement obligations tied to changes in the underlying asset’s share price, while hybrid securities also involve interest and dividend payments as well as refinancing burdens. If companies’ ability to bolster equity capital through equity offerings is constrained and their reliance on these alternatives grows, their financial risks could increase.
Researcher Kang warned, “If companies’ ability to raise equity capital through equity offerings is constrained, their reliance on borrowing or structured finance could increase, potentially adding to their repayment burdens and financial risks.”
In particular, compared with advanced financial markets such as the United States, equity offerings account for a smaller share of funding at domestic companies, and the absolute amount they raise through them is also limited.
The expansion of shareholder returns was also identified as a new credit risk factor. The value of treasury shares retired by listed companies in South Korea rose from 13.9 trillion won in 2024 to 21.4 trillion won last year, and reached 43.1 trillion won in January–May this year. In just five months, the total had exceeded twice the amount retired over the whole of last year.
Researcher Kang said, “If pressure to expand shareholder returns and improve capital efficiency leads to excessive changes in companies’ financial policies, it could increase the strain on financial stability when business conditions and earnings deteriorate.” The report identified as key areas to monitor the appropriateness of shareholder returns relative to free cash flow and investment needs, as well as the possibility of adjusting return policies during an economic downturn.
Changes are also expected in how companies support their affiliates. This is because the Commercial Act amendments require companies to scrutinize more rigorously the necessity and economic benefits of providing financial support to affiliates. Core affiliates essential to a group’s supply chain and business structure are relatively likely to be able to justify such support, while companies may become less willing to support noncore affiliates with lower strategic importance, analysts say.
Researcher Kang said, “The Commercial Act amendments are likely to heighten the importance of assessing existing credit dependence rather than introducing separate evaluation factors.” He added, “The importance of assessing the actual incentives to provide support—including each affiliate’s strategic importance, business and financial links, and the economic impact on the group as a whole if support is discontinued—will grow further.”
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