How Controlling Shareholders Steal a Company - The Reality of Tunneling

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■ Introduction to the paper

- Title: When Are Convertible Bonds Converted?

- Author: Heo Seo-young

- Source: Seoul National University Master’s Thesis, 2025

- Data: Analysis of all 1,146 Korean CBs issued from 2017 to 2019

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■ What the paper reveals — How do CBs rob individual investors?

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[1] Structure of Refixing CB

- General CB: Conversion when stock prices rise → Bond investors convert to stocks to realize profits

- Refixing CB: Adjust conversion price downward when stock price falls → Conversion possible even when stock price falls

- Result: Stock price falls → Conversion price adjustment → More shares issuance → Stock price falls further → Conversion price adjustment again

- This structure is called the Death Spiral.

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[2] What the data proves

- Refixing CBs have a higher conversion rate — CB investors convert even when stock prices fall

- Immediately after announcement of refixing CB issuance → stock price cumulative abnormal return (CAR) significantly decreased

- The operating performance of companies issuing refixing CBs is lower than that of companies issuing general CBs.

- The market also perceives refixing CB as a negative signal.

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[3] Why do individual investors suffer losses?

- CB investors (private equity funds, institutions): Can sell after conversion even if the stock price falls → Protect against losses

- Existing minority shareholders (individual investors): stock dilution → decline in share value → double loss

- Double pressure of stock price decline + share dilution → Structure in which only individuals are affected

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■ Evangelist’s empathy: CB is a tool

- As the paper states, the profit structure of refixing CBs is asymmetrical from the beginning.

- CB investor (private equity fund): Switch even if it goes down, switch even if it goes up → Always advantageous

- Existing shareholders (individuals): No matter what happens, dilution → always disadvantageous

- This is a result of design. It's not a mistake

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There is a pattern in the order in which private placement CBs are issued:

· Controlling shareholders or related parties move first

· Issuing CB through private placement — to a specific power, not through public offering

· CB investors can profit no matter whether the stock price rises or falls

· With a refixing clause, you can take more shares as the stock price falls.

· Individual investors end up holding diluted shares later.

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■ Relational Risk Funding Risk

- RaymondsRisk tracks CB issuance patterns as a Funding Risk indicator.

- A surge in private CB issuance = a signal of capital inflow from certain forces

- Whether there is a refixing clause = basis for judging whether the stock price is designed to fall

- Analysis of relationship network between CB issuer and corporate executives = Human Risk connection

- By connecting these three things, you can catch the start of the death spiral in advance.

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■ Conclusion

- The first question individual investors should ask when a CB announcement is made:

  “Does this CB have a refixing clause?”

- Second question: “Who are CB investors? Are they connected to existing executive networks?”

- Financial statements do not answer this question. Relational risk is the answer

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■ Reference materials

- Seoyoung Heo, When Are Convertible Bonds Converted?, Seoul National University Master's Thesis 2025: https://s-space.snu.ac.kr/handle/10371/221654

- Financial Supervisory Service DART (Electronic Disclosure System): https://dart.fss.or.kr

- RaymondsRisk White Paper: https://www.konnect-ai.net/whitepaper

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