Problems with Privately-placed Detachable Warrant Bonds Issuance System in Korea

Yoon, Pyung Sig

Korean Journal of Financial Studies 2015;44(1):25-51.
Published online February 28, 2015.

Pyung Sig Yoon

분리형 사모 신주인수권부사채 발행제도의 문제점

윤평식

Abstract

This study examines the problems related to the privately-placed detachable bonds with warrants (BW) or warrant bonds issued for the period of 1999 through 2013 in Korea. We analyzed 373 privately-placed detachable BW issues where the financial institutions sold part of warrants to affiliated persons of the issuers. Major empirical findings are in the following sentences. First, the volatility used in calculating the theoretical value of the warrant is about one-third of the correct volatility. Secondly, those who purchased the warrant from financial institutions earned about 460% on average for one year. For comparison, the average return of common stock was -2% over the corresponding period. Third, the refixing option to adjust the exercise price downward in case of a decrease in stock price should not be included in the BW because it only affects the probability of exercise. Fourth, it has a structural conflict-of-interest problem; it is the company that bears the costs, but it is the owner that gets the benefits. Some affiliated persons of the issuers actually earned unacceptably high return from purchasing warrants due to an inappropriate loophole in the privately-placed detachable BW issuance system.

Key Words: 분리형 사모,신주인수권 가치,신주인수권 환매,신주인수권부사채,행사가격 조정옵션,Bond with Warrant,Detachable Private-Placement,Refixing Clause,Warrant Buyback,Warrant Value