“Discount Issue of New Shares Is Inevitable’ A Sharp Drop in the Stock Price

LG Group’s announcement to support LG Card Co. on November 17 confirms the group’s goal to keep LG Card alive.

The main part of the support plan involves pouring one trillion won of capital into LG Card through methods such as issuing new shares to be purchased by the first half of next year. And that part has already been known to the market.

The stock market was sensitive to LG Group’s announcement and LG Card’s report to invite foreign capital, but little change took place in the bond market.

Backgrounds and an outlook: The market has continuously asked for LG Group to intervene. Despite its own continuous efforts, LG Card reported a cumulative deficit of 1.168 trillion won from the beginning of this year to September -- one of the worst results among the listed companies. Though LG Card tried securing the capital, the amount of corporate bonds and commercial papers (CP) due before the end of this year is up to about 1.6 trillion won.

In efforts to solve its problems, LG Card tried to issue shares to be purchased at 30 billion won in December, an asset-backed loan of 38 billion won, new bonds, and a renewed 60 billion won in maturing bonds.

But since October, the number of bond issues dropped sharply and financing through ways such as LG Card-specialized funds became difficult.

LG Group does seem willing to keep LG Card afloat and wants to raise its value instead of leaving it alone to the end or fire-sale it.

In announcing the plan, LG Group revealed its intention to sell LG Card to solid foreign investors at the proper price, saying, “…to complete the additional invitation of the capital from foreign and domestic strategic investors who receive deposits.”

Market’s viewpoint and response: On the same day in the Korean Stock Exchange (KSE), the stock price of LG Card dropped substantially after the opening, but rallied a little at the end of the day to 12,150 won -- down by 950 won (7.25 percent) from November 14.

The price dropped down to 11,800 won once on the same day. The “discount issue of the shares to be purchased” -- which is to issue the shares at a lower price than the face value or the market price to the new shareholders -- reflects the inevitability of a sharp drop in the price of original shares when a company welcomes foreign capital.

But after LG Group opened the possibility of securing the capital by ways other than issuing shares through the announcement at 2:45 p.m., the price rallied a little.

An LG Card official said, “We can preserve original shares’ values by ways such as the issuance of convertible bonds (CB) or bonds with warrants (BW), followed by the calling and cancellation of those bonds before the conversion into the stocks would be declared.”

But Sung Byung-soo, an analyst of Kyobo Securities Co., said, “The issue of new shares has already been decided and no details about the 70 billion won are confirmed. Therefore the stock price will groan under the burden for some time.”

The bond market did not show much response. Recently, LG Card’s bonds have not traded well in either the primary nor secondary market.

Shin Dong-jun, an analyst of Korea Investment & Securities Co., said, “Only after the announced plan is concrete will the bond trading recover.”

Keuk-In Bae Suk-Ho Shin bae2150@donga.com kyle@donga.com