Convertible bonds that long served as a funding lifeline for South Korean pharmaceutical and biotech companies are coming back as a repayment burden after a sharp slide in share prices. With stocks trading below conversion prices, more investors are choosing to exercise put options to recover principal and interest rather than convert into shares.
The KRX Health Care Index closed at 3,555.29 on the 28th, according to the Korea Exchange. That is down about 26.9% from 4,865.56, its close on the final trading day of last year.
As the biotech downturn drags on, refixing — lowering the conversion price of convertible bonds — has become widespread. At least seven pharmaceutical and biotech companies, including Lab Genomics, have cut conversion prices over the past month, citing falling share prices. Some bonds have been reduced by as much as 30% from their initial conversion price, reaching the lowest level allowed under their contracts.
Refixing is a mechanism that lowers the conversion price of a convertible bond when a stock falls, cushioning investor losses. But the lower the conversion price, the more shares the same bond amount converts into, increasing dilution for existing shareholders and the overhang of potential share supply. When a stock trades below even the contractual floor, no room is left for further refixing, making it more advantageous for investors to exercise put options.
Cash is already flowing out of biotech firms. Through Sept. 28 of this year, at least 48 put options were exercised at listed bio and health care companies. The face value of the bonds redeemed early totaled about 255 billion won, and the amount companies actually paid, including interest, reached about 272 billion won. Lunit accounted for the largest share at about 75.1 billion won, followed by Korea Pharma at 23 billion won, CMG Pharmaceutical at 21.5 billion won and Lab Genomics at 21.1 billion won.
The concern is further repayment pressure ahead. HLB's 40th convertible bond has 30 billion won outstanding and reaches its first early redemption date on Feb. 28 next year. The conversion price has fallen to 36,514 won from 41,575 won amid the recent stock decline. "Put options can be exercised from February on the 30 billion won in bonds, but the actual amount redeemed may vary depending on the share price at the time, conversion conditions and investors' judgment," an HLB official said. "We plan to deploy available funds flexibly in line with the actual scale of put option exercises and respond in a stable manner while minimizing the impact on existing business operations."
Some companies have already seen conversion prices fall to the contractual floor. The conversion price on Woojung Bio's eighth convertible bond dropped to 2,515 won from 2,764 won, hitting the minimum. It has 3.5 billion won in bonds outstanding, with early redemption dates on Nov. 30 this year and Feb. 28 next year.
S.Biomedics also saw the conversion price on its fifth convertible bond fall 30% to 23,065 won from an initial 32,950 won, reaching the contractual floor. After redeeming part of the issue following the first put option exercise last month, the remaining face value stands at 1.245 billion won.
A bigger problem is that cash-strapped companies are issuing new equity-linked bonds to repay existing ones. DT&CRO issued a total of 20 billion won in February, including 14 billion won in new convertible bonds and 6 billion won in bonds with warrants, earmarking 17.9 billion won of that for debt repayment.
"When a share price falls well below the conversion price, exercising the put option to recover principal and the agreed return is a rational choice for investors," an official in the financial investment industry said. "But if the bonds issued for refinancing are also refixed because of further stock declines, added repayment burdens and dilution concerns could weigh on share prices again in a vicious cycle."
