According to the financial investment industry on the 10th, HyundaiEngineering&Construction’s stock price, based on the day’s closing price of 110,700 won, is trading 26.5% below the conversion price of 150,607 won for the convertible bonds (CBs) that the company resolved to issue last June and completed payment for on July 7. Given that the interest rate on these convertible bonds is 0% and they do not include a refixing (conversion price adjustment) clause, investors have no choice but to rely solely on a potential rebound in the stock price for a return.
If HyundaiEngineering&Construction had issued regular corporate bonds instead of convertible bonds, it would have had to pay interest of around 20 billion won annually. This is because the interest rate on 3-year corporate bonds with HyundaiEngineering&Construction’s current credit rating (AA-) stands at the mid-4% range per annum. As a result, investors have effectively shouldered the company’s financing costs without receiving a single won in interest.
While the current structure places the entire burden on investors, the market sentiment was quite different just two months ago. As recently as last June, when the issuance resolution was made, the KOSPI index was on an upward trajectory and a favorable wind was blowing across the stock market as a whole; thus, HyundaiEngineering&Construction was able to secure terms that were entirely favorable to the issuer by leveraging its strong creditworthiness.
A large, high-quality company with an “AA-” credit rating—which typically uses convertible bonds (CBs) as a tool for companies with lower credit ratings to reduce interest burdens—opted for this issuance, excluding not only a 0% coupon rate and maturity rate but also the refixing clause and the early redemption right (put option).
This explains why NH INVESTMENT & SECURITIES (200 billion won), Korea Investment & Securities (150 billion won), and KIWOOM Securities (150 billion won) underwrote the entire issuance despite the somewhat stringent terms for investors. With the stock market recently entering a phase of increased volatility, the outcome is widely viewed as one in which investors ultimately bear all the disadvantages.
The problem is that HyundaiEngineering&Construction’s financial situation is not strong enough to expect a rebound in its stock price. Because it has secured overseas projects using the milestone payment method—where payment is invoiced upon reaching specific project milestones—a significant amount of cash is tied up in working capital. As a result, a large volume of accounts receivable is tied up as working capital, causing accounts receivable to accumulate rapidly even amid declining sales, which has significantly slowed cash flow.
In fact, HyundaiEngineering&Construction’s average accounts receivable at the end of the first quarter of this year stood at 5.4656 trillion won, a 25.7% increase from the end of last year (4.3490 trillion won). During the same period, revenue fell 12.8% year-over-year to 7.4556 trillion won from 8.5453 trillion won. A construction company’s accounts receivable include outstanding payments for construction projects and pre-sales.
Consequently, the accounts receivable turnover ratio fell from 7.5 times to 5.5 times, while days sales outstanding rose from 48.6 days to 66.8 days. This means the time required to convert receivables into cash has lengthened from one and a half months to more than two months. Profitability indicators also took a step backward. First-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at 241.6 billion won, a 12.8% decrease compared to the same period last year (277.0 billion won).
This mounting cash flow burden lies at the heart of HyundaiEngineering&Construction’s decision to raise funds through convertible bonds (CBs) rather than conventional corporate bonds. Given that cash flow from operating activities has turned negative due to rising accounts receivable, the company calculated that conditional, interest-free financing would be far more advantageous than having to pay tens of billions of won in interest annually.
The trend among top-tier companies to opt for CB financing to avoid interest burdens amid high interest rates also played a role. Previously, #KOREA AEROSPACE INDUSTRIES issued 500 billion won worth of convertible bonds under similar terms last March. However, since investors can exercise their early redemption rights starting in March 2029, the level of investor protection is higher than that offered by HyundaiEngineering&Construction. SK ie technology(361610)also attempted to issue convertible bonds under similar terms but withdrew the plan due to shrinking demand caused by a sharp drop in its stock price.
In this regard, a HyundaiEngineering&Construction official explained, “Since the issuance took place last month, it is somewhat premature to assess investment risk based solely on current short-term stock price movements.” The official added, “Investors can expect to profit from conversion if the stock price rises in the future, and if they choose not to convert, they will receive their principal back at maturity. Therefore, it is difficult to conclude that investment risk has increased based solely on the current stock price.”
