Kakao Games, a video game publisher and subsidiary of South Korea’s tech giant Kakao, is in a challenging situation as its stock price continues to decline after raising 270 billion won through selling shares in game developer Krafton, whose stock is climbing. In August, Kakao Games issued exchangeable bonds at a 15% premium to Krafton’s price, which has since risen by nearly 20%. Investors in these bonds are already benefiting from valuation gains. With a grim outlook for Kakao Games’ third-quarter performance, analysts are lowering their target price for the company.
According to the financial investment industry on Oct. 17, NH Asset Management, which purchased all of Kakao Games’ second tranche of exchangeable bonds, is reporting valuation gains based on the exchange price of Krafton shares. Krafton’s stock price closed at 340,500 won on Oct. 15, exceeding the exchange price of 324,027 won.
Kakao Games issued the exchangeable bonds for 833,330 shares of common stock it holds in Krafton for a term of five years. Since 2016, before Krafton was listed on the stock market, Kakao Games has held shares that account for about 1.74% of Krafton’s total issued shares.
NH Asset Management invested 25 billion won, while five private placement investment trusts it manages—NH Absolute Project K General Private Placement Investment Trust, NH Absolute Return General Private Placement Investment Trust No. 1, NH Absolute Venture Secondary General Private Placement Investment Trust, NH Absolute Mezzanine General Private Placement Investment Trust No. 5, and NH Absolute Project K Plus General Private Placement Investment Trust—acquired the remaining 245 billion won in exchangeable bonds.
NH Asset Management can exchange the bonds for Krafton shares at a set price of 324,027 won, which reflects a 15% premium over Krafton’s stock price. Since the bonds carry a 0% interest rate, NH Asset Management must wait for Krafton’s stock price to exceed the exchange price to realize any profits.
The exchange of shares has been possible since Sept. 19, one month after the issuance of the exchangeable bonds. Krafton’s stock as of the closing price on Oct. 15 was 5% higher than the exchange price. Compared to Krafton’s closing price of 285,500 won on Aug. 6, the day the issuance was announced, the stock has risen by 19%. Despite the valuation gains, NH Asset Management reportedly does not plan to exchange the shares immediately. Kakao Games can exercise a call option (sell option) on NH Asset Management, but the amount they can sell is limited to 25% of the total issuance.
Institutional investors in Kakao Games are stepping back, unable to secure profits due to the ongoing decline in its stock price. At the end of September, Kakao Games repaid 81.5 billion won of the remaining 92.5 billion won in its first exchangeable bonds before maturity. This early repayment occurred because bondholders exercised their put option for early redemption after Kakao Games’ stock price fell below the conversion price of 52,100 won. These exchangeable bonds were issued by Kakao Games in March 2021 for a total of 500 billion won. Most investors began exercising their put options to recover their principal starting in January this year, as Kakao Games’ stock price dropped to the 20,000 won range. The remaining first tranche exchangeable bonds amount to 11 billion won.
The outlook for both companies diverges regarding future performance and stock price expectations. Kakao Games is projected to fall short of anticipated results for the third quarter.
In October, three brokerage firms that analyzed Kakao Games lowered their target prices to between 18,000 and 21,000 won.
