HMM shares crash on overhang scare after state fund converts debt into shares

[Source: HMM Co.]

Shares of South Korean flag ocean carrier HMM Co. tanked nearly 10 percent on Wednesday on overhang concern after state-run Korea Ocean Business Corp (KOBC) chose to act out its right to covert 600 billion won ($512.6 million) worth debt into common shares.

HMM shares closed Wednesday at 26,900 won, down 8.5 percent from previous session’s close. It lost over 1 trillion won in its market cap from 11.9 trillion won on Tuesday to 10.9 trillion won, yanking down the stock by six notches to 40th in the Kospi rank.

HMM, technically nationalized after state bailout, on Tuesday disclosed that KOBC exercised its rights to covert HMM’s unsecured convertible bonds, worth 600 billion won, into common shares. The state-backed institution, administering marine transport funds, acquired the convertible bonds to bail out HMM in 2017 amid lengthy maritime commerce slump to promote it as the sea carrier in place of Hanjin Shipping that went bust.

The bonds are eligible to be exchanged for 83,647,009 common shares at 7,173 won apiece. The shares would be worth 2.2 trillion won based on Wednesday’s closing price.

KOBC becomes the second largest shareholder with a 19.96 percent stake after state lender Korea Development Bank owning 20.69 percent.

Conversion of bonds into common stock dilutes the value of existing shares, thus places a negative pressure on stock price. Overhang also has alarmed shareholders as the lump of shares could be sold to redeem public funds.

KOBC promised not to sell shares that could negatively affect the corporate and stock value until HMM is full normalized. It will disallow brokerages to lend its holdings for short selling.

Oversupply and overhang issue is expected to weigh over shares of the shipper who has been benefiting from a long-awaited boom in global commerce.

HMM had issued total 3.28 trillion won worth of convertible and warrant-linked bonds to escape liquidity crisis. When all the bonds are traded into stock, the number of HMM’s outstanding shares could swell to 1 billion from current 400 million.

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