[Meritz Securities Capital Increase] Credit Over Cash—Why the CPS Plus Put Option Strategy Is a Game Changer < Stock < Article

(Seoul=Yonhap Infomax) Ha Rin Song, Kyu Sun Lee – Meritz Securities Co. has unveiled an aggressive strategy to accelerate its capital base to 8 trillion won ($6.1 billion).

Rather than a conventional rights issue allocated to its holding company, Meritz Securities opted for a private placement of convertible preferred shares (CPS) combined with a put option via a special purpose company (SPC).

According to the financial investment industry on the 26th, Meritz Securities will issue 500 billion won ($382 million) in CPS through a third-party allocation on December 12. The move aims to bolster its capital strength and position the firm for direct competition with other major investment banks (IBs). The capital increase will raise Meritz Securities’ standalone equity from 7.1917 trillion won to 7.6917 trillion won.

Smart Funding: Leveraging Credit Over Cash via SPC

The funding structure is notably unique. While Korea Investment & Securities Co. and NH Investment & Securities Co. previously received direct cash infusions from their holding companies, Meritz Securities is leveraging the holding company’s credit instead of cash.

The entire 500 billion won CPS issuance will be acquired by the SPC “Nexrise Jeilcha,” which will then issue asset-backed securities to investors. Meritz Financial Group, the holding company, provides a put option to the SPC, guaranteeing to repurchase the shares if investors exercise the option. This structure allows the CPS—despite being issued by the unlisted Meritz Securities—to be regarded as bond-like in stability, backed by the strong credit rating of Meritz Financial Group.

Defending Leverage, Expanding Capital—A Dual Objective

The complex structure is designed to minimize financial strain on the listed holding company, Meritz Financial Group. The group already faces high financial burdens from subsidiary investments and payment guarantees, with a double leverage ratio of 119.3% as of end-June—above the industry average of 112.7% (as of end-March).

Direct capital injections into subsidiaries would further raise this ratio. By providing a put option on the CPS, the holding company avoids immediate cash outflows, limiting the impact on its balance sheet.

Choosing CPS over hybrid capital securities or subordinated bonds was a matter of “capital quality.” As of end-September, Meritz Securities had already met half its net operating capital requirements (2.8 trillion won) through subordinated securities. Credit rating agencies have called for more conservative capital management, as the capital recognition of subordinated securities diminishes over time. Thus, Meritz Securities opted to strengthen its core capital (Tier 1) by issuing non-redeemable CPS.

Following the capital increase, Meritz Securities’ old net capital ratio (NCR) is expected to improve from 146.5% to 159.2%, while the new NCR will jump from 1,353.6% to 1,724.1%. The leverage ratio will also fall from 893.1% to 833.2%, enhancing financial soundness.

Minimum 5.2% Yield, Put Option Safety Net—Bond-Like Equity Ups Investment Appeal

The CPS offers a high dividend yield, ranging from a minimum of 5.2% to a maximum of 8.0% per annum. Although conversion would result in unlisted Meritz Securities shares—limiting immediate market gains—the structure ensures robust cash flow and principal protection.

The key safety net is the put option provided by Meritz Financial Group, allowing investors to sell the shares back to the holding company from October 2027, about two years after issuance. This offers principal protection equivalent to an “AA” credit rating.

The cumulative dividend feature further enhances stability. If the company fails to pay dividends in a given year, unpaid dividends accrue and are carried forward. Common stock dividends are fully restricted until all preferred dividends are paid, effectively making dividend payments mandatory. For investors, this structure delivers bond-like security with high returns.

Industry observers interpret Meritz Securities’ willingness to bear funding costs above 5% as a sign of confidence in its profitability. The company expects to deploy the raised capital into high-yield assets such as corporate finance (IB), generating a return on equity (ROE) exceeding the dividend rate. As of Q3 2023, Meritz Securities’ annualized ROE stood at 11.7%, demonstrating its ability to generate profits above its funding costs.

hrsong@yna.co.kr
kslee2@yna.co.kr

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Ha Rin Song hrsong@yna.co.kr