Hyosung Chemical’s KRW 200 Billion in Perpetual Bonds Carry 11.8% Interest Despite Return to Profit [fn Market Watch]

[Financial News] Hyosung Chemical has been unable to escape the burden of high-cost financing despite returning to profitability in the first half of this year. Last month, it did not exercise the call option on KRW 100 billion in hybrid securities, sending the interest rate up from 8.3% to 11.8% annually. With a second rate step-up following the one in February, the total amount of hybrid securities subject to the high 11.8% rate rose to KRW 200 billion. In addition, the rate on private bonds issued at the end of September, with a maturity of about six months, reached 6.75%, suggesting that the company’s high-cost financing structure persists despite improved results.
According to the investment banking (IB) industry on the 13th, Hyosung Chemical issued KRW 50 billion in privately placed corporate bonds on the 30th of last month. The coupon rate is 6.75% annually, and the bonds mature on April 1, 2027. This means the company is paying a rate close to 7% even on short-term bonds with maturities of only about six months. The issue highlights that, despite improvements in its financial structure through asset sales and better results, the company still faces high borrowing costs in the bond market.
In particular, the interest burden on existing hybrid securities increased further in September. On the KRW 100 billion in hybrid securities issued by Hyosung Chemical on Sept. 26, 2024, the call option was not exercised on the 26th of last month, two years after issuance. As a result, the contracted rate rose by 3.5 percentage points, from 8.3% to 11.8%. On a simple annualized basis, the annual interest burden on the bonds will therefore increase by KRW 3.5 billion, from KRW 8.3 billion to KRW 11.8 billion.
The same step-up also applied to KRW 100 billion in hybrid securities issued in February 2024 after the call option was not exercised this February. With the rates on both bonds rising to 11.8%, their annual interest burden is expected to jump to around KRW 20 billion. Hyosung Chemical’s outstanding hybrid securities currently total KRW 400 billion. Although hybrid securities are classified as equity for accounting purposes and help improve financial ratios, the cash outflow from interest payments remains a burden.
The price return swap (PRS) contract backed by a stake in the Vietnamese subsidiary is another potential source of financial burden.
Last year, Hyosung Chemical sold a 49% stake in its Vietnamese subsidiary Hyosung Vina Chemicals to the special purpose company (SPC) Hyosung Vina First, and entered into a PRS contract worth about KRW 379.9 billion. The contract runs from June 2025 to June 2028. Under its terms, Hyosung Chemical must pay the difference if the underlying asset’s value at settlement is below the settlement reference price.
Hyosung, the holding company, is also providing credit support. As of August, Hyosung’s guarantees and other credit support related to Hyosung Chemical totaled KRW 937.9 billion, of which about KRW 370 billion consisted of a liquidity support agreement related to the PRS for the Vietnamese subsidiary.
The Vietnamese subsidiary’s own performance is improving. Hyosung Vina Chemicals posted net income of KRW 45.2 billion in the first half of this year, returning to profit from a net loss of KRW 105.1 billion in the same period last year. However, cumulative losses still exceed KRW 1 trillion, leaving the company with the task of securing stable profitability and improving its financial structure. Observers say the related risks need to be monitored closely, as the value of the stake at the time of PRS settlement could determine the financial burden, regardless of the recovery in performance.
The problem is that improved operating results have not yet led to a sufficient recovery in cash generation. Hyosung Chemical returned to profit, reporting consolidated operating profit of KRW 171.1 billion in the first half of this year, but its operating cash flow was negative KRW 3.6 billion. Interest payments during the same period amounted to KRW 41.2 billion. The working capital burden from increases in accounts receivable and inventory also affected cash flow.
[email protected] Kim Hyun-jung Reporter