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S. Korean Smaller Companies Look to Private Money Market for Funds
Due to Stock Market Crash
S. Korean Smaller Companies Look to Private Money Market for Funds
  • By Yoon Young-sil
  • November 2, 2018, 10:07
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South Korean Smaller and mid-size companies will no longer be able to raise funds from the stock market.

As the South Korean stock market showed a steep decline, companies are faltering from the root. Small and mid-sized companies, which have difficulty in taking out a loan from banks and getting capital compared to large businesses, have been raising funds from the stock market. However, they will no longer be able to do so as a result of the recent stock market crash. As they cannot raise funds, they are nosing around the private capital market or unwillingly trying to sell off their assets.

According to investment banking (IB) industry sources on November 1, Anterogen Co., a bio firm listed on the tech-heavy KOSDAQ market, failed to increase capital, though it tried to recapitalize until October 31. The company was planning to raise 20 billion won (US$17.65 million) of funds from institutional investors, such as NH Investment & Securities Co., KB Securities Co. and Mirae Asset Daewoo Co. but the payers didn’t participate in the paid-in capital increase. Anterogen was seeking to gain a foothold for the long term by raising funds. However, institutional investors were reluctant to make an investment due to the recent fall in stock prices and lack of investors' confidence in bio stocks. Bio companies which develop stem cell therapies, like Anterogen, need a huge amount of money for research and development (R&D) from clinical trials, facility expansion to new drug development. Anterogen is very promising to its product be designated as an orphan drug in the United States but the company is now struggling to raise funds after the failure in the capital increase.

Other companies which are preparing to recapitalize are also worried. This is because the issue price has gone down due to the recent drop in stock prices and there is a dim outlook on the domestic stock market for a while. KOSDAQ-listed firm KMW Co. planned to increase capital by 35 billion won (US$30.89 million) for its facility and operating funds and repayment of loans in September 20. The company manufactures RF components for cellular communication base stations. These are core equipment in the era of 5G networks. The initial price of new stock issuance was 20,350 won (US$17.96) but the company lowered the price to 19,200 won (US$16.95) reflecting the recent stock prices. Consequently, the total amount to be raised decreased a whopping 13.1 billion won (US$11.56 million) as well.

As VirtualTek Corp., the first-generation venture listed on the KOSDAQ in 2000, also greatly reduced the price of new stock issuance, its targeted capital dropped as much as 2.5 billion won (US$2.21 million). The current stock price stands at 780 won (US$0.69) but it set the price as low as possible by offering a 25 percent discount in order to succeed in increasing capital at all costs.

As the issuing price has lowered due to the stock market slump, an increasing number of companies is also trying to meet the targeted capital by increasing the number of shares. Jeil Pharma Holdings Inc., which adopted a holding company structure, needed 377.1 billion won (US$332.83 million) of funds to issue new shares and exchange them with shares of its subsidiary, Jeil Pharmaceutical Co. The price of new stock issuance decreased from 32,208 won (US$28.43) to 23,950 won (US$21.14) so the number of new stocks to be issued had to be increased from 11,708,830 to 15,746,054. The more the company issued stocks, the bigger burden it had to bear. However, there was no other way.

The issuance of convertible bond (CB) is another way to raise capital but the situation is similar. When the stock market is bullish, a company can make profits by converting them to shares. Under the current circumstances, however, investors are reluctant to make an investment. This is because they don’t want to own bonds as the money is tied up.

Some companies which cannot get money have no choice but to sell off their assets. Hanssem Co., which recently showed a rapid decrease in business results, decided to sell land located in Munjeong-dong, Songpa-gu, Seoul, for 80.7 billion won (US$71.23 million). The company bought the land for its new office building. Fine Technix Co., which produces components for cellphones, also announced to sell its land and building in Anyang, Gyeonggi Provice, for 12.1 billion won (US$10.68 million).