LIG Nex1 Stockpiles KRW 1 Trillion War Chest as Defense Boom Accelerates

[Korea Financial Times, Shin Haeju] LIG Nex1 (CEO Shin Ik-hyun) is laying the groundwork for expanded fundraising by raising the issuance limits for convertible bonds (CBs) and bonds with warrants (BWs) to a combined KRW 1 trillion. The move to bring the company's previously low issuance caps — relative to other domestic defense firms — up to par is widely seen as a preemptive measure to position the company for large-scale project bids and investments ahead.

LIG Nex1 will put an agenda item to amend its articles of incorporation before shareholders at its annual general meeting on the 31st. The proposed revision would raise the issuance limits for CBs and BWs from KRW 100 billion each to KRW 500 billion each — a fivefold increase.

Under the current articles, CBs and BWs may each be issued up to KRW 100 billion for management purposes including the introduction of new technologies and improvement of financial structure. The company's position is that the limit increase is a natural step in line with its growing scale.
"The existing issuance limits were set a long time ago," a LIG Nex1 spokesperson said. "We are building preemptive safeguards in step with our performance growth."

LIG Nex1's current bond issuance limits lag behind those of other domestic defense companies. Hanwha Systems has a CB issuance limit of KRW 400 billion, while Hyundai Rotem's stands at KRW 800 billion.

Revenue Up 126% in Five Years — Reserve Capital Secured to Match Expansion

LIG Nex1 has posted revenue growth of 126% and operating profit growth of 260% over the past five years. In particular, last year's full-scale exports of the Cheongung-II (M-SAM 2) air defense system to the Middle East helped the company cross the KRW 4 trillion annual revenue threshold for the first time in its history. Its order backlog at end of last year reached KRW 26 trillion 230 billion, while its share price surged 1,271% from 2021 through last year.

Industry observers note that LIG Nex1 has no record of issuing CBs or BWs in the past five years, fueling speculation that the limit increase may signal more than a precautionary measure — possibly anticipating large-scale investment in the near term.

Some market participants, however, have raised concerns that the issuance of CBs and BWs — potentially up to KRW 1 trillion in total — in place of conventional corporate bonds or bank borrowings could create an overhang (latent selling pressure) on the stock. This is because both instruments carry the option to be converted into shares, which would increase the total share count and put downward pressure on LIG Nex1's stock price.
CBs, or convertible bonds, are debt instruments that can be converted into a predetermined number of shares at the holder's discretion, while BWs, or bonds with warrants, grant the holder the right to purchase new shares at a set price. Both carry characteristics of both debt and equity.

The embedded equity conversion option allows companies to raise funds at lower interest rates than conventional corporate bonds, yielding significant savings on interest costs. Should the instruments later be converted into shares, the resulting shift from debt to equity would also be expected to improve the company's financial structure.

Preventing Shareholder Value Dilution Is Key

As of end-September last year, LIG Nex1's standalone debt-to-equity ratio stood at a high 403.1%. Analysts, however, attribute this to accounting structures unique to the defense industry. The figure reflects advance payments received upon contract signing, which are recorded as liabilities, alongside corresponding prepayments made to subcontractors.

"The effective debt-to-equity ratio — adjusted by netting advance receipts against prepayments — comes in at 250.5%, which is considerably lower than the headline figure," said Kim Hyung-jin, a senior researcher at NICE Credit Rating.

Nonetheless, should CB or BW investors exercise their conversion rights amid rising share prices, a large volume of new shares would be issued, potentially diluting the equity value of existing shareholders.

On this point, a LIG Nex1 spokesperson said: "As there are no specific issuance plans at this time, the impact on the share price is expected to be limited. When actual issuance occurs, we will thoroughly review measures to protect shareholder value."

Separately, LIG Nex1 last month issued KRW 340 billion in corporate bonds and received a credit rating upgrade from 'AA-/Stable' to 'AA/Stable,' reflecting its strong financial standing.

The proceeds are earmarked for use through 2031: KRW 190 billion for raw material procurement for Middle East operations, KRW 10 billion for logistics and transportation costs, and KRW 140 billion for research and development (R&D) of integrated air defense and unmanned systems solutions.

Interest in the Cheongung-II system has been growing following reports that the system achieved a 96% intercept success rate against ballistic missiles fired by Iran in the recent U.S.-Israel–Iran conflict.

"Reports indicate that the United Arab Emirates (UAE), a key customer, has ordered early delivery of Cheongung-II batteries and additional guided missiles," said Lee Han-gyeol, an analyst at Kiwoom Securities. "A single Cheongung battery can fire 32 guided missiles, with each missile estimated to be priced at approximately KRW 1.5 billion."

Shin Haeju (hjs0509@fntimes.com)