LG Energy Solution shares decline amid concerns over LG Chem’s bond sale

[Courtesy of LGES]

LG Energy Solution Ltd, a subsidiary of South Korea’s LG Chem Ltd., showed a weak start on Wednesday due to concerns over the potential burden of its parent’s exchangeable bond (EB) issuance.

Shares of LG Energy Solution were trading at 535,000 won ($415) as of 11:40 a.m. Wednesday, down 2.73 percent from the previous session, after opening at 532,000 won.

On Tuesday, LG Chem announced after the market closed that it would issue foreign currency EBs worth 2.6 trillion won ($2 billion) using shares of LG Energy Solution. LG Chem is the largest shareholder, holding an 81.84 percent stake in the electric vehicle battery manufacturer.

The exchange price for the bonds was set around 700,000 won, with a premium of 25~35 percent added to the previous day’s closing price of LG Energy Solution shares.

If the LG Energy Solution stock price rises to the level reflected by the premium, bondholders will have the option to exchange LG Chem’s bonds for LG Energy Solution shares. The exercise period for the exchange rights begins on August 28.

In the event of a full exchange, the exchangeable bonds would cover about 3.69 million shares, representing about 1.6 percent of the total number of LG Energy Solution shares.

While LG Chem’s decision to issue EBs rather than selling stakes through after-hours block deals helped avoid a sharp decline in stock prices, there are concerns about the potential impact of the increased shares on the market.

Investors are also concerned that LG Energy Solution’s share price could be affected by similar issues as LG Chem tries to raise funds for new businesses.

Majority shareholder overhang is also a concern given that LG Chem holds a significant stake in LG Energy Solution, leaving very few shares in circulation. The share price decline on Wednesday reflects these negative factors.

However, local brokerage firms took a positive view, noting that the “worst” was averted.

“By choosing to issue exchangeable bonds instead of selling shares, the short-term stock price volatility will be relatively small,” said Cho Cheol-hee, an analyst at Korea Investment & Securities.