Controversy is brewing over institutional investors’ large-scale short selling of Hyundai Merchant Marine Co. stocks ahead of the debt-ridden company’s planned issuance of 200 billion won ($179.4 million) worth of convertible bonds (CBs).

On Wednesday, a day after South Korea’s second-largest container carrier announced its CB sale plan, Hyundai Merchant Marine shares plunged 27.9 percent from the previous day to close at 7,640 won. Extending losses, its shares closed 7.1 percent lower at 7,100 won on Thursday, and in just two days, 114.7 billion won in Hyundai Merchant Marine’s market value has been erased.

According to the Korea Exchange and multiple sources from the investment industry on Thursday, a total of 155,655 shares of Hyundai Merchant Marine were shorted on Tuesday. Of the total trading volume of Hyundai Merchant Marine, 37 percent were short sale orders, marking the first time that shorted stocks of Hyundai Merchant Marine have exceeded 30 percent this year. After the market close on the day, the container carrier disclosed its plan to sell CBs to five creditors including the Korea Development Bank (KDB).

Speculation is now rife that institutional investors who worried about dilution of their stockholdings following the CB issuance or hedge funds that obtained information about the company’s bond sale plan beforehand might have taken advantage of short selling, causing big losses to retail investors who are currently restricted from borrowing stocks of companies under administrative control like Hyundai Merchant Marine to short sell them.

Institutional shareholders who will buy the CBs are KDB (148.4 billion won), Woori Bank (13.9 billion won), Nonghyup Bank (11.9 billion won), KB Kookmin Bank (8.6 billion won), and Korea Securities Finance Corp. (17.2 billion won). Hyundai Merchant Marine said it will sell the bonds to the creditors as part of an earlier announced restructuring plan to swap existing debt into shares.

It is immediately unknown who shorted Hyundai Merchant Marine stocks on Tuesday, but institutional investors net sold 61,137 shares of Hyundai Merchant Marine on the day while foreign investors 23,818 shares. Top brokerages that placed short sale orders of the container carrier were Korea Investment Co. (46,770 shares), Deutsche Securities Co. (32,467 shares), Hyundai Securities Co. (29,444 shares), and Merrill Lynch & Co. (12,240 shares).

The convertible bond sale came after the shipping company sold new shares to investors as part of its debt-for-equity swap plan. Retail investors who bought the new shares suffered from a double whammy of stock value dilution following the unexpected CB sale and a sharp fall in stock price due to large-scale short selling presumably by institutional and foreign investors. Institutional and offshore investors can borrow stocks from public funds or asset management firms for short sale.

An unnamed official from the Financial Supervisory Service said that a surge in short selling of Hyundai Merchant Marine stocks could have been related to the bond sale and that it would look closely into those who are suspected of having been involved.

By Choi Jae-won

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