According to the investment banking (IB) industry on the 23rd, Richmond Valley Energy Reserve Holdings, an Australian subsidiary of KoreaZinc, is conducting a third-party private placement worth 400.5 billion won targeting a special purpose company (SPC) established by Meritz Securities. KoreaZinc’s headquarters separately entered into a three-year PRS agreement with Meritz Securities, using the new shares of the subsidiary as the underlying asset.
The interest rate for this PRS issued by KoreaZinc has been set in the mid-5% range per annum. Compared to major conglomerates that have issued PRS in the past, it is higher than SK On and LGCHEM,LTD (early 4% range), similar to ECOPRO CO., LTD (5% range), and lower than LOTTE CHEMICAL CORPORATION (6% range). Even when compared to the average yield (4.571%) on 3-year corporate bonds with an AA rating, such as those issued by KoreaZinc, it is about 1 percentage point higher.
This interest rate differential appears to stem from differences in the funding currency and benchmark interest rates. KoreaZinc raised this funding not in Korean won but in 387 million Australian dollars (AUD). The current Australian benchmark interest rate stands at 4.35% per annum, which is higher than South Korea’s rate of 2.75%. Since the base rates for the Korean won and the Australian dollar are fundamentally different, a simple one-to-one comparison is considered unrealistic.
It is also highly likely that the liquidity risk of KoreaZinc’s Australian subsidiary—which serves as the underlying asset—was factored in. Historically, major South Korean conglomerates have used stakes in companies listed on the domestic stock market—such as SK Innovation(096770), LG Energy Solution(373220), and ECOPRO BM CO., LTD.(247540) —as underlying assets. In contrast, the Australian entity used by KoreaZinc as the underlying asset is a newly established, unlisted local company founded in April of this year, which has not even prepared its financial statements yet. Given that shares of unlisted companies are less liquid than listed stocks, a premium is inevitably reflected in the interest rate to some extent.
Some analysts suggest that Meritz Securities likely used the creditworthiness of KoreaZinc’s parent company as the de facto collateral, rather than the intrinsic business value of the unlisted Australian affiliate. A PRS is a derivative product that pays out profits or losses based on a comparison of the stock price at maturity to a strike price. Given the structure of the PRS, even if the affiliate’s stock price declines three years from maturity, KoreaZinc’s parent company—which holds an AA credit rating—will cover the full amount of the loss.
An investment banking industry official explained, “KoreaZinc opted for a form of capital raising that does not increase its book debt ratio, thereby reaching a compromise at an interest rate in the 5% range,” adding, “This is an example of the company actively expanding indirect financing methods amid large-scale overseas CAPEX initiatives and a management control dispute.”
