Convert a convertible bond (CB) into shares and the bond itself disappears. Exercise the warrant attached to a bond with warrant (BW) and the bond stays on the books. That single line generates every other difference between the two instruments.
Say a company raises 10 billion won. With a CB, conversion simply shifts 10 billion won of debt into equity and the story ends. With a BW, the investor pays fresh cash for the new shares, so money flows into the company while the 10 billion won bond remains a debt to be repaid at maturity. Counting only the new shares in the filing hides that difference.
Does the bond survive or vanish?
Korea's KDI Economic Information and Education Center describes a convertible bond as a structure in which the bond disappears and shares appear. The conversion right is fused to the bond, cannot be detached, and extinguishes the bond when exercised. A BW's warrant, by the same source's metaphor, is more like a detachable supplement: it is issued as a separate certificate and, under the right conditions, can be sold to a third party.
The moment of becoming a shareholder differs too. A CB holder becomes a shareholder the instant conversion is claimed, because no further payment is due. A BW holder must in principle pay in the subscription money first. If the terms allow daeyongnabip (payment in kind, substituting the bond's principal and interest for the share price), the bond is extinguished as shares are issued and the outcome matches a CB. That is why the filing's payment-in-kind clause matters.
| Item | Convertible bond (CB) | Bond with warrant (BW) |
|---|---|---|
| Nature of the right | Convert bond into shares | Right to subscribe for new shares |
| Bond after exercise | Extinguished | Survives (extinguished if paid in kind) |
| Additional cash payment | None | Required (none if paid in kind) |
| Right transferable alone | No | Yes, if detachable |
| Becomes shareholder | On conversion claim | On payment of subscription money |
| Statutory basis | Commercial Act art. 513 et seq. | Commercial Act art. 516-2 et seq. |
Same 10 billion won, different dilution and different cash
Take a company with 10 million shares outstanding, a 10 billion won bond issue, and a conversion or exercise price of 10,000 won per share. The last row applies a repricing down to the regulatory floor discussed below — 70% of the original price, or 7,000 won.
| Scenario | New shares issued | Total shares after | Dilution of existing holders (%) | Extra cash into company (bn won) | Bond remaining (bn won) |
|---|---|---|---|---|---|
| CB converted at 10,000 | 1,000,000 | 11,000,000 | 9.1 | 0 | 0 |
| BW exercised with cash at 10,000 | 1,000,000 | 11,000,000 | 9.1 | 10 | 10 |
| BW exercised in kind at 10,000 | 1,000,000 | 11,000,000 | 9.1 | 0 | 0 |
| Exercised after repricing to 7,000 | 1,428,571 | 11,428,571 | 12.5 | 10 | 10 |
Dilution is new shares divided by total shares after issuance. The point is that row three equals row one: a BW with a payment-in-kind clause is a BW in name only, indistinguishable from a CB in both ownership and cash terms. Only row two brings new money into the company, and the price of that money is that the 10 billion won repayment obligation stays. Whether the balance sheet improves or worsens is decided right there.
Row four shows that a 30% cut in the exercise price produces 42.9% more shares. Dilution widens from 9.1% to 12.5%, a gap of 3.4 percentage points. The bond amount is unchanged at 10 billion won; only the share count grows. It is the same mechanism as in the convertible bond repricing case, where the conversion price falls to its floor.
How far are detachable warrants allowed today?
Detachable BWs were once banned outright. Law firm Shin & Kim, reviewing the amended Capital Markets Act, notes that detachable warrant bonds had been abused as a device for irregular succession of management control or for takeover defence by controlling shareholders, that listed companies were therefore barred from issuing them, and that the ban applied to board resolutions on bond issuance made on or after 29 August 2013.
The scope is narrower now. Article 165-10 of the Capital Markets Act provides that a listed company may not issue, by private placement, bonds whose warrant certificates alone can be transferred. Private-placement detachable warrants are closed; public offerings are open. So the private-versus-public label and the detachability label have to be read together in any filing. A private placement described as detachable is a fact worth checking twice.
The repricing floor is 70%
When the share price falls, the adjustment clause kicks in. The Financial Services Commission's Regulation on Issuance and Disclosure of Securities, article 5-23, sets the floor for downward adjustment at 70% of the original conversion price as a rule, to prevent excessive dilution, with an exception where a special shareholder resolution permits going lower.
The Commercial Act adds a ceiling on top of that. Article 516-2(3) states that the aggregate issue price of shares to be issued upon exercise of warrants may not exceed the amount of the bond. Lower the exercise price and the aggregate stays pinned to the bond amount, so the share count rises instead. Cut a 10 billion won BW's exercise price from 10,000 to 7,000 won and the aggregate is still 10 billion won, while the shares go from 1 million to roughly 1.42 million.
What sets the size of the dilution is the exercise price, not the bond amount. The bond amount is only a ceiling.
What to watch in the filing
Everything below can be checked in a single issuance filing. Where these items break one way or the other, the share-price scenarios that follow break with them.
- Payment-in-kind clause — if allowed, no new cash reaches the company
- Private placement versus public offering, plus the detachability label — private detachable issues are barred for listed companies
- Initial exercise price and the adjustment floor — if below 70%, look for the special resolution behind it
- Earliest date for the put option — for a BW, where the bond survives, this date is a cash-flow schedule
- List of subscribers — if the largest shareholder or related parties appear, the ownership motive deserves separate scrutiny
- Dilution measured against total shares after issuance — converted the same way as in the third-party allotment rights issue calculation
There is a clear case in which this framework fails. If the share price stays below the exercise price until the exercise window closes, the warrants go unexercised and no dilution occurs; what remains is the repayment burden alone. Dilution figures are a maximum that assumes exercise, and should be read on that assumption.
References
- Convertible bonds and bonds with warrants — KDI Economic Information and Education Center
- Commercial Act art. 516-2 (issuance of bonds with warrants) — Korea Law Information Center
- Capital Markets Act art. 165-10 — Korea Law Information Center
- Regulation on Issuance and Disclosure of Securities — Korea Law Information Center
- Introduction to the amended Capital Markets Act — fundraising by listed companies (Shin & Kim)