Kumho Engineering & Construction to lower debt ratio with 50 billion won in perpetual convertible bonds... Interest burden in three years [fn Market Watch]

[Financial News]  Kumho Engineering & Construction is raising 50 billion won in capital using private equity fund (PEF) money. It is issuing perpetual convertible bonds (CBs) to lower its debt ratio. However, with interest rates set to rise in stages beginning three years after issuance and conversion into shares set to inevitably dilute existing shareholders’ stakes, balancing improvements to its financial structure against the cost of capital has emerged as a key issue.
According to the investment banking (IB) industry on the 21st, Kumho Engineering & Construction will issue perpetual CBs worth 35 billion won and 15 billion won, respectively, to Woori NH Shared Growth No. 1 Private Equity Partnership and KB NH Corporate Financial Stability Private Equity Partnership. The payment date is scheduled for the 30th.
The CBs are subordinated bonds with a 2056 maturity, which the company can extend in 30-year increments. They are structured to meet the accounting requirements for recognition as equity, with the aim of improving financial soundness. Kumho Engineering & Construction’s consolidated debt ratio was in the 400% range at the end of the first half of this year, and the need to raise capital remains.
The cost of funding is a point to watch. The initial coupon rate is 4% per year, while the yield-to-maturity guarantee is set at 8.5%, compounded annually. In particular, starting at the end of October 2029, three years after issuance, the interest rate will rise by 2.5 percentage points each year. The rate is capped at 20% per year.
Kumho Engineering & Construction may redeem the bonds early every three months starting October 30, 2029. Investors, however, have no put option allowing them to demand early repayment.
Although immediate repayment pressure has been eased, the interest burden will grow over time, making the decision on refinancing or early repayment in three years a key variable.
Existing shareholders still face the risk of dilution. The conversion price is 11,839 won per share, and converting all the bonds into shares would result in the issuance of about 4.22 million new shares. That is equivalent to 10.24% of the total shares outstanding, according to the disclosure. Conversion requests may be made starting at the end of October next year.
The IB industry, meanwhile, views the deal as securing equity-like capital to improve financial indicators rather than simply raising working capital. The structure is seen as allowing PEF investors to benefit both from interest income and from the possibility of recovering their investment through conversion into shares.
A source in the IB industry said, “Ultimately, the key is how much Kumho Engineering & Construction can improve its profitability and financial structure during the three years it has secured,” adding, “If the effects of the capital raise do not translate into improved performance, the cost of capital from future interest-rate increases and the potential burden of share dilution could come back into focus.” 
[email protected] Kim Kyung-a Reporter