Korean companies have issues convertible bonds (CBs) worth 5 trillion won so far this year. As the stock market plunged, increasingly more firms issued CBs at low points. In particular, as demand for hedge funds that invest in pharmaceutical and bio-tech companies has been growing, pharmaceutical and bio-tech companies are scaling up their CB issuance one after another.
This year’s CB issuance amounted to 4.95 trillion won by Dec. 12, according to data released by Koscom, a financial IT solutions company, on Dec. 16. CB issuance swelled steadily from 1,794.1 billion won in 2015 to 3,831.4 billion won in 2016, 3,374.1 billion won in 2017 and 4,155.6 billion won in 2018. The outstanding balance doubled to 15,545.7 billion won from 7,238.7 billion won at the end of 2016.
Among small and mid-sized companies, pharmaceutical and biotech companies continue to issue CBs. All were issued for private placement. "Pharmaceutical and biotech companies need a lot of money for research and investment," said an industry insider. "CB issuance costs less than the issuance of corporate bonds or bank loans. This is why pharmaceutical and biotech companies ramp up financing by means of CBs.” In practice, CB surface yields are typically at the 0 percent level.
Hedge funds balance CB supply and demand by sweeping CBs issued by pharmaceutical and biotech companies into their investment carts, experts say.
However, concern is growing over the lopsided issuance of CBs by pharmaceutical and biotech companies. Investors are beginning to question these companies’ ability to repay. An official at a securities firm noted that about half of the companies that issued CBs were pharmaceutical and bio-tech companies. “It is high time to examine their financial soundness," the official said.