Chapter 28. Dongwoo Precision (2)

Generally, when people think of investment, they tend to think of stocks, and bonds seem a bit unfamiliar.

However, the actual market size of bonds is much larger.

This is because it includes not only corporate bonds but also government and municipal bonds.

Due to the large transaction amounts, institutions mainly invest, and individual investments are usually made indirectly through funds.

The Premius Fund, once called the National Fund and heavily invested in by individual investors, was also a bond fund.

Bond funds are more stable but offer lower returns compared to stock funds. It's impossible to achieve several times the return in a short period like with stocks through typical bond investments.

However, if it's an unconventional investment, it's entirely possible to achieve higher returns than stocks.

The most significant factor affecting the bond market is interest rates.

When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.

However, when it comes to individual bonds, the most significant factor is the stability of the issuing institution.

Unlike stocks, bonds have fixed interest and maturity dates. Therefore, if held until maturity, the principal and interest can be received.

But what if the issuing entity goes bankrupt before maturity?

Then there's no way to recover the money.

Bonds are issued based on the stability of the issuing institution, and government-issued bonds are considered the safest.

However, not all government bonds are safe.

Sometimes countries can go bankrupt. They might refuse to pay, or they might offer to pay only a portion of the principal and end it there.

If countries can reach such a state, how much worse can it be for companies?

Every day, countless companies are born and disappear. If a company goes bankrupt, its corporate bonds become worthless.

If a company with low credit issues bonds or if a company's credit rating drops due to adverse events, the risk of default on principal and interest increases.

In such cases, the bonds are traded at a significant discount from their issue price.

These are known as junk bonds.

Literally, they are called 'junk bonds.'

The term is so negative that when explaining to investors, they are often referred to as high-yield bonds to soften the impact.

It's the same thing.

If successful, they can yield ten times the investment, but if they fail, not a single penny can be recovered.

While typical bond investments are 'low risk, low return,' junk bond investments are the typical 'high risk, high return.'

For mutual funds, there are regulations that prohibit the purchase of bonds below a certain rating. However, private funds are more flexible in this regard.

Given the high risk, normal funds don't even consider junk bonds, but conversely, there are funds that specifically seek out junk bonds due to the high returns.

These are officially called high-yield funds but are commonly known as vulture funds.

Vulture refers to the bald eagle.

They are called this because they gather on rotten meat that others won't touch.

Successful vulture funds can achieve 100% returns in a month through junk bond investments. Of course, this is a rare occurrence, and most funds end up losing their principal.

Nevertheless, the potential for high returns makes junk bond investments quite attractive.

* * *

I reviewed the information on Dongwoo Precision.

Semiconductors are produced through various processes.

Wafer, oxidation, photolithography, etching, thin film, metal wiring, EDS, packaging.

The processes up to wafer processing are generally considered the front-end process, and the processes after that are the back-end process. Among the processes in the photolithography stage is the exposure process.

The exposure process involves using light to draw circuit patterns on a wafer coated with a photosensitive solution. This process is so important that it accounts for 60% of the total production time and 30% of the cost of semiconductor production.

Given that it involves etching fine circuits in a small space, it requires extremely precise technology.

The report roughly states that it is similar to developing film photographs, but since I don't know how to develop film photographs, the analogy doesn't quite resonate.

Does anyone even use film cameras these days?

Anyway, Dongwoo Precision is a company that produces components related to exposure equipment.

The management, seeing the high potential of the market, aggressively invested funds raised through bonds and loans, successfully developing stamps used in NIL (Nano Imprint Lithography) and supplying them to Chinese foundries.

It seemed that they were on a path to success, with their competitiveness proven and supplies to Korean foundries also underway, but then a problem arose.

A serious defect occurred in the supplied components.

The stamp, which etches circuits, wears out over time, but the wear happened much faster than expected.

In semiconductor production, even a small issue can lead to the shutdown of the factory and the scrapping of all products.

The foundries that received Dongwoo Precision's equipment components had their factories shut down one after another. Dongwoo Precision recalled the components, but the customers turned their backs.

In the semiconductor market, where high technology is required, a loss of trust is fatal.

Supplies were halted, and a comprehensive inspection of the previously supplied components began. Instead of new orders, they faced compensation claims.

With operating funds running out, Dongwoo Precision urgently sought to raise funds.

Under normal circumstances, they could have issued 800 billion won worth of corporate bonds and extended loans, providing some relief.

However, due to the Premius incident, the corporate bond market was completely frozen. They couldn't even consider issuing new corporate bonds, and banks refused to extend or provide additional loans.

Ultimately, Dongwoo Precision failed to repay the maturing corporate bonds and entered into a workout.

Although it didn't receive much media attention due to the Cobalt Gate, there were quite a few articles when I looked into it.

[Dongwoo Precision fails to issue new corporate bonds due to low demand]

[Dongwoo Precision's 600 billion won worth of corporate bonds mature. Requests rollover from institutions]

[Two NB HighTech factories stop due to stamp inspection. Estimated damage: 160 billion won]

[Customers halt use of Dongwoo Precision equipment components. Bigger problems ahead]

[Dongwoo Precision faces delisting. Possibility of corporate restructuring?]

The debt-to-equity ratio is a staggering 1900%. The stock is in a trading halt.

On the Dongwoo Precision stock board, small shareholders' cries of despair were heard.

- When will the trading halt be lifted?

- Analysts, you bastards!!! You said it was a leader in semiconductor components? You said there was high potential for stock price increases?

- Reality is a trading halt 😢

- The threat of delisting is sharp~

- Is the debt-to-equity ratio real? How much money did they borrow?

- Be grateful for the trading halt. When it's lifted, it will be 10 consecutive limit-downs.

- 😂 Ant hell, KOSDAQ.

- How is this different from KNC International?

- After the Cobalt Gate, the Stamp Gate?

- I listened to the good prospects from the securities company and put in my rent money, now I'm getting divorced. My wife handed me divorce papers today. It's my fault, I have nothing to say 😢 To my wife, who has a lousy husband... I'm sorry!!!

- There's someone on the 30th floor!

- Please, just save me 😢

- No, I won't. I have no intention of saving you. Go away~

The maturities of corporate bonds and loans are rolling in, but institutions are hesitant to roll over. Not only has the repayment of maturing bonds been suspended, but the payment of interest on existing bonds has also stopped.

All factories and research institutes have come to a halt. Employees are showing up to work with nothing to do.

At this point, it's safe to say the company is doomed.

While reviewing the information, I received a call from Dongho.

[It's about Dongwoo Precision, as I mentioned yesterday.]

"Did you find out?"

[Do you know it's in a trading halt now?]

"Yes."

[The corporate bonds they've issued are enormous. Over 500 billion won worth of bonds have matured without being repaid.]

"How much are they trading for?"

[I asked a friend who works as a bond broker. They seem to be trading at around 10-15% of the issue price. Since the company will go bankrupt, they're essentially worthless. Institutions are desperate to sell.]

"I see."

I smiled inwardly.

Dongho, curious, asked:

[Why did you ask about this?]

"It's... because..."

Because, contrary to everyone's prediction that it will go bankrupt, Dongwoo Precision won't go bankrupt.

I dodged the question.

"Someone asked me to check."

[You know, you shouldn't touch such junk bonds. If you mess with them, you could lose everything in one go.]

"I understand. Thanks, senior."

I hung up and thought.

If I buy the corporate bonds of a company that's about to go bankrupt at a steep discount and the company survives, then I can recover the principal and interest!

If I buy at 10% of the issue price, I can make ten times the investment!

This actually happened.

Then, how did Dongwoo Precision survive? It was because a company called XRT Semicon in Singapore acquired it.

When this news broke, the bond prices, which had fallen to the bottom, soared to par value.

Those who invested in Dongwoo Precision's corporate bonds at the time made nearly ten times the return, and the institutions that sold at a steep discount regretted it.

"Originally, it should have happened like that..."

There's one point that's troubling.

Originally, Dongwoo Precision's liquidity crisis was supposed to occur a year later. However, the Premius incident, which was supposed to happen two years later, is happening now, causing the crisis to occur now.

With the timing changed, will XRT Semicon still acquire the company as it did before?

Given that history has already changed, there's no guarantee that the same situation will unfold. Even if they do acquire it, it's unknown how long it will take.

During the first round, negotiations over the acquisition price dragged on for six months before a deal was finally made.

If I buy Dongwoo Precision's corporate bonds now, I'll have to wait for six months to a year for the acquisition to happen.

If the company goes bankrupt, the corporate bonds will become worthless.

Therefore, it would be wise not to touch this at all...

"But it would be a waste not to."

According to Dongho, institutions are currently shedding their bad bond investments due to the Premius incident. As a result, the prices of bad corporate bonds have fallen, and it's possible to buy them in large quantities at once.

It's a good product to invest in now.

"Thinking about it, the problem is that XRT Semicon will acquire the company."

Right now, only I know that Dongwoo Precision will become an indispensable and crucial company in the semiconductor industry within three years.

In fact, it's not an exaggeration to say that the history of semiconductors will be changed by this company.

Is there no other good way?

Since history has already been changed by me, why not twist it even further?

"Instead of sitting and waiting for the acquisition, why don't I take the initiative to make it happen?"

A shift in thinking, perhaps?

As I thought about it, ideas started to come to mind.

I roughly planned it in my head and then picked up my phone to call someone.