Kakao returns home for CB issue

For the second time in less than a week a Korean firm is shying away from the international bond markets in favour of a local issue.
Kakao is the operator of KakaoTalk, Korea's leading instant messaging application
Kakao is the operator of KakaoTalk, Korea's leading instant messaging application

Kakao Corp has become the second Korean issuer in the space of a week to opt for a domestic equity-linked deal, announcing plans to raise W250 billion ($219 million).

The Kosdaq-listed company’s decision follows hot on the heels of GS Engineering & Construction (GS E&C), which is also raising W250 billion from a domestic convertible bond to refinance a previous dollar-denominated deal.

Unlike GS E&C, Kakao has not previously issued in the international markets. However, a number of convertible bond traders told FinanceAsia the chat app and web search operator had been sounding out an international deal after it acquired a controlling stake in Korea's LOEN Entertainment for $1.56 billion this January.

This roughly $200 million international CB would have had a double zero structure (zero coupon and zero yield) with a won denomination and dollar settlement. Bond traders also said Kakao sounded out a conversion premium of over 30%, which was considered aggressive at the time.

One convertible bond specialist said the local currency-denominated structure ended up proving too difficult to execute because of the extra costs incurred in hedging foreign exchange positions.

On top of this, the company has limited demand for foreign funding since most of its operations are within Korea.

Kakao is an investment grade credit domestically, with an AA- rating from both Korea Investors Services and Korea Ratings Corp. However, it is not rated internationally, which would have made an international deal harder to place with outright investors in Europe, the CB specialist added.

Re-financing bridge loan

Terms for the new domestic deal are similar to those previously considered for an international deal.

They comprise a five-year bond with a three-put bond option, plus a zero coupon and zero yield-to-maturity. The conversion price has been fixed at W120,014, which represents a 22.7% premium to Kakao’s Monday close at W97,800.

Year-to-date the stock is down 13.13%, underperforming the Kosdaq, which is up 1.63%. However, it has had a very volatile ride so far this year.

After plunging from W115,300 at the beginning of the year to a low of W92,300 in mid-February, it then bounced back to W112,200 by mid-March before falling to a second low of W96,800 in early April. 

Meritz Securities and Samsung Securities are joint bookrunners for the convertible sale, which forms part of Kakao’s plan to refinance a Won800 billion bridge loans with longer-term debt.

According to Kakao’s stock exchange filings, it has acquired a 76.4% stake in LOEN Entertainment, substantially increasing its short-term borrowings from W3.7 billion at the end of last year.

Based on its cash holdings of W397 billion, the company will still require approximately W150 billion for the repayment.

Synergies?

Equity investors will be looking for synergies with LOEN Entertainment. In particular, the latter’s music streaming platform Melon could be a new growth driver for Kakao, which has seen the number of active KakaoTalk users on its instant messaging service remain largely unchanged since the second quarter of 2014.

However, Samsung Securities says potential synergies are unlikely to be reflected on the share price over the short-term because of the dilution associated with a new share issue to part fund the purchase.

In January, Kakao issued 6.91 million shares at W109,121 each to Loen Entertainment shareholders. At that time, the share issue implied an 11.5% dilution for existing Kakao shareholders.

In 2015 Kakao’s revenue increased 87% year-on-year to W932 billion, but profitability has declined by 50% to W88 billion due to a much larger 162% increase in operating expenses.

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