This article is educational content about how a market mechanism generally works. It is not investment advice and does not describe any specific company, security, or current event.
A bond that can end up handing over more shares the further its underlying stock falls sounds like an odd bargain for everyone else still holding that stock. Yet that is roughly the shape of a clause embedded in a large share of the convertible bonds (CBs) and bonds with warrants (BWs) issued by companies listed in South Korea. The clause, known as refixing, periodically resets downward the price at which a bond converts into shares, or at which an attached warrant can be exercised, whenever the underlying stock has fallen. Left without limits, that adjustment could dilute existing shareholders almost indefinitely. Korean regulation puts a floor under how far the price can be reset, and that single number does more to shape the country’s CB and BW market than almost any other rule on the books.
How the Refixing Clause Works
A convertible bond bundles an ordinary corporate bond, paying interest and returning principal at maturity, with an option to convert that principal into a fixed number of shares at a preset conversion price. A bond with warrants keeps the bond and the equity option as two separate, sometimes separately tradable, pieces, but the underlying logic is the same. At issuance, the conversion or exercise price is usually set close to the prevailing market price of the stock. Many Korean CB and BW contracts then specify a refixing schedule, commonly a review every three months, under which that price is recalculated based on the stock’s recent trading average. If the stock has declined since issuance, the conversion or exercise price moves down with it, meaning each bond now converts into a larger number of shares than before.
Issuers include the clause because it makes the security more attractive to bond investors, who gain a form of protection against a falling share price, in exchange for accepting a lower coupon than a plain bond would require. It has proven a popular financing tool for companies, often smaller or fast growing ones, that find raising fresh equity directly more costly or more dilutive than issuing a hybrid instrument.
Why Regulators Set a Floor
Without any limit, a falling stock price could trigger refixing after refixing, expanding the number of shares owed to bondholders with no natural stopping point, at the direct expense of existing shareholders. To contain that risk, Korea’s Financial Investment Services and Capital Markets Act, overseen by the Financial Services Commission and the Financial Supervisory Service, restricts how low a refixing adjustment can push the conversion or exercise price. As a general rule, that price cannot be reset below 70 percent of the price originally fixed at issuance, sometimes called the base price. Certain structures tied to rights offerings or other issuance methods follow separate procedures, but the 70 percent threshold is the reference point most market participants use when discussing CB and BW terms.
The floor does not eliminate dilution risk, it caps it. Combined with the frequency of refixing reviews, it sets the outer bound on how many additional shares a bond can ultimately convert into, giving both issuers and existing shareholders a calculable worst case rather than an open ended one.
What Happens Once the Floor Is Reached
Once the conversion or exercise price hits the regulatory floor, further declines in the stock no longer trigger additional downward adjustments; the price simply stays fixed at that level. From that point on, the option component behaves like a standard, unadjusted convertible feature: its value moves with the stock, but the built in downside cushion for the bondholder disappears. Many Korean CB and BW structures pair this outcome with other contractual features, such as a right for the bondholder to demand early repayment (a put option) on preset dates, giving investors an alternative exit if the equity option has lost its appeal.
Refixing adjustments, and the base price they are measured against, are subject to public disclosure requirements, so the mechanics of any individual bond’s dilution potential are a matter of record rather than private negotiation. Understanding both pieces, the refixing clause and the regulatory floor beneath it, is central to reading how any Korean CB or BW is actually structured, independent of what happens to any particular stock.
