[Edaily Reporter KIM SAE-MI ] While Y-Biologics ( Y-Biologics, Inc(338840)) will allow holders to exercise their conversion rights for its 35 billion won convertible bonds (CBs) starting on the 7th, observers suggest the likelihood of a large volume of shares immediately flooding the market is limited. This is because the current stock price is more than 28% below the conversion price, and the repricing clause triggered by a decline in the market price has been removed.

CB Conversion Possible Starting the 7th… Stock Price 28% Below Conversion Price

According to the Financial Supervisory Service’s electronic disclosure system on the 3rd, Y-Biologics, Inc. issued its first series of private placement convertible bonds (CBs) worth 35 billion won last August to raise working capital and research and development funds. The conversion price is 11,430 won per share, and the conversion request period runs from the 7th through July 7, 2030.

If the convertible bonds are fully converted into shares, 3,062,117 new common shares will be issued. This represents 17% of the total number of shares outstanding at the time the convertible bond issuance was decided. Based on the number of shares prior to the issuance, this ratio stands at 20.48%. Given the significant potential supply, existing shareholders may be concerned about equity dilution and the possibility of a surge in selling pressure.

However, some analysts point out that the mere fact that conversion requests are now possible does not necessarily lead to immediate conversion and sale of shares. CB investors decide whether to convert based on factors such as the difference between the conversion price and the market price, the potential for future stock price appreciation, and early redemption conditions. If the market price is lower than the conversion price, investors can purchase the same shares more cheaply on the market, reducing the economic incentive to convert the CB into stock.

Y-Biologics, Inc.’s closing price on the 29th of last month—the previous trading day—was 8,180 won. This is 3,250 won (28.4%) lower than the conversion price of 11,430 won. At current stock price levels, it is difficult to realize a profit immediately after converting the CB into shares. This is why analysts suggest that investors are unlikely to rush to convert until the stock price rises above the conversion price and enters a range where meaningful profits can be realized.

An industry insider noted, “If the difference between the conversion price and the current stock price is not significant, there is no reason to rush to convert them into shares,” adding, “In fact, there are many cases where investors delay conversion while waiting for the company’s value to rise.”

Reducing the Burden of Additional Dilution by Removing the Resetting Clause

Recently, biotech companies have been taking steps to reduce the additional dilution burden caused by falling stock prices by either omitting or removing refixing clauses altogether. iNtRON Biotechnology, Inc.(048530)issued 3 billion won worth of convertible bonds (CBs) last June without including a refixing clause, and HEM Pharma Inc. also alleviated concerns about an overhang by reaching an agreement with investors that same month to remove the refixing clause from its Series 1 CBs.

Y-Biologics, Inc. also reduced the burden of additional dilution on December 30 of last year by consulting with bondholders to remove the periodic refixing clause from its existing convertible bond agreement. Originally, the conversion price could have been lowered every seven months after issuance to reflect the stock price, down to 8,010 won—70% of the initial conversion price.

Had the repricing clause remained in place, the number of shares that could be issued from the 35 billion won in convertible bonds could have increased from the current approximately 3.06 million shares to a maximum of about 4.37 million shares. With this contract amendment, the structure whereby the conversion price would decrease due to a decline in the stock price—thereby increasing the number of potential shares—has been eliminated. Standard conversion price adjustment clauses related to capital changes—such as rights offerings at a discount, bonus share issuances, stock splits or consolidations, and mergers—remain in effect.

The call options held by the company also serve to partially limit the volume of short-term conversions. Y-Biologics, Inc. or a party designated by the company may purchase up to 15% of the total convertible bonds from this month through August of next year. Bondholders must, in principle, hold the shares subject to the call option in the form of convertible bonds until August 7 of next year. In other words, even if conversion requests begin this month, the structure does not allow the entire volume to be converted into shares all at once.

However, this does not mean that concerns about overhang have completely disappeared. The removal of the refixing clause is a measure designed to prevent the potential number of shares outstanding from increasing further due to a decline in the stock price. The existing potential conversion volume of approximately 3.06 million shares has not disappeared. If the stock price rises above the conversion price due to factors such as technology transfers or clinical results, a surge in conversion requests could once again bring the supply burden into focus.

Conversely, if the stock price remains below the conversion price for an extended period, the burden of cash redemption may increase instead of share dilution. CB investors can request early redemption at 106.09% of the principal starting August 7, 2027. Assuming all investors exercise their redemption rights, the company would have to pay approximately 37.1 billion won.

Ultimately, the industry view is that the mere fact that conversion requests are set to begin does not make it highly likely that a large-scale overhang will materialize immediately for Y-Biologics, Inc.’s convertible bonds. This is because the current stock price is significantly below the conversion price, and with the repricing clause removed, the short-term incentive for conversion is low. In particular, since the enterprise value of biotech companies fluctuates significantly depending on major events such as technology transfers and clinical trial results, CB investors are also likely to monitor future growth momentum and stock price trends before deciding when to convert.

An official from Y-Biologics, Inc stated, “We are continuously communicating with investors and sharing updates on our business progress,” adding, “We will do our best to address market concerns by enhancing our corporate value and delivering tangible results.”