Dongwoo Precision (2)
When people talk about investing, they usually think of stocks first. Bonds, by comparison, tend to feel a little unfamiliar.
But in terms of actual market size, bonds are far larger.
That was because the category included not only corporate bonds, but government and municipal bonds as well.
Since the trading volume was so huge, institutions did most of the investing, while individuals usually got in indirectly through funds.
The Primus Fund, which had once been marketed as a national fund and drew in a great many retail investors, had also been a bond fund.
A bond fund offered excellent stability, but compared to stock funds, the returns were low. With ordinary bond investing, there was no way to make several times your money in a short period the way you could with stocks.
But if the investment wasn’t ordinary, then it was entirely possible to earn even higher returns than you could from stocks.
The biggest factor influencing the bond market was interest rates.
When rates rose, bond prices fell; when rates fell, bond prices rose.
But if you looked at an individual bond, there was one factor even more important than that: the stability of the issuer.
Unlike stocks, bonds had a fixed interest rate and maturity date. If you held one until maturity, you were guaranteed to receive both principal and interest.
But what if the issuer went under before maturity?
Then the road to getting your money back simply vanished.
Bonds were issued on the strength of the issuer’s stability, which was why government bonds, issued by the state itself, were considered the safest of all.
But not every government bond was safe just because it was a government bond.
Sometimes countries themselves went bankrupt.
Sometimes they flat-out said they weren’t paying and told creditors to pound sand; other times they offered to repay only part of the principal and called it settled.
If even a country could sink that low, what was a company supposed to do?
Companies were being born and dying by the thousands every single day. When a company collapsed, its corporate bonds became nothing but scraps of paper.
If a low-credit company issued them, or if some piece of bad news dragged the company’s creditworthiness down, the risk of default on principal and interest shot up.
Those kinds of corporate bonds traded far below their issue price.
They were called junk bonds.
Literally, they were “trash bonds.”
Because the term sounded so awful, people sometimes softened it when explaining things to investors and called them high-yield bonds instead.
Same thing, really.
If ordinary bond investing was “low risk, low return,” then junk-bond investing was the classic “high risk, high return.”
In public funds, rules outright forbade buying bonds below a certain rating. Private funds, however, had a bit more freedom from that kind of regulation.
The risk was so high that normal funds wouldn’t even take a nibble at junk bonds, but on the other hand, because the returns could be huge, there were funds that hunted for nothing but junk bonds.
The formal term was high-yield fund, but people usually called them vulture funds.
A vulture was a bald eagle.
The nickname came from the way they gathered around rotten meat no one else would touch.
A successful vulture fund could sometimes make 100 percent in a single month just by investing in junk bonds.
Of course, that was the exception. Most of them were the kind of funds that ate into their own principal.
Still, in the sense that they could produce massive gains, junk bonds were certainly attractive.
I went through the materials on Dongwoo Precision.
Semiconductors were made through a variety of processes.
Wafer preparation, oxidation, photolithography, etching, thin-film deposition, metallization, EDS, packaging.
Usually, wafer processing was considered the front end, and everything after that the back end. Among those steps, one of the processes in photolithography was exposure.
Exposure was the process of using light to draw circuit patterns on a photoresist-coated wafer. It accounted for roughly 60 percent of total semiconductor production time and more than 30 percent of costs, which showed just how important it was.
Because it was the work of engraving microscopic circuitry into an impossibly small space, it demanded extremely precise technical skill.
The report described it in broad strokes as being similar to developing film photographs, but since I didn’t really know how film photographs were developed in the first place, the analogy didn’t land all that well.
Did anyone even use film cameras these days?
Anyway, Dongwoo Precision was a company that produced components related to precisely that exposure equipment.
Seeing the market’s potential, management made an aggressive round of investments using money raised through bonds and loans, successfully developed a stamp used in NIL technology, and supplied it to a Chinese foundry.
With its competitiveness proven, the company seemed ready for a straight run of success, even landing orders from Korean foundries as well.
Then trouble struck.
A serious defect appeared in the supplied parts.
The stamp used to imprint circuits wore down over time, and the problem was that this wear progressed much faster than expected.
In semiconductor production, one wrong move could shut down an entire factory and force every finished product to be scrapped.
The foundry plants that had received Dongwoo Precision’s equipment parts ground to a halt one after another. Dongwoo Precision took responsibility and carried out a recall, but the clients turned their backs all at once.
In the semiconductor market, where such high technical skill was required, losing trust was fatal.
Orders were suspended across the board, and a full inspection of every previously supplied part began. Rather than taking on new contracts, they were now looking at the possibility of having to pay compensation.
Once operating cash ran dry, Dongwoo Precision rushed to secure financing.
Under normal circumstances, this was when they would have issued 80 billion won in corporate bonds and bought themselves some breathing room by rolling over their loans.
But at the moment, because of the Primus Fund disaster, the corporate bond market had frozen solid.
They couldn’t even dream of issuing new bonds, and the banks refused to extend their loans or provide more financing.
In the end, Dongwoo Precision failed to repay the bonds that had come due and entered workout.
It hadn’t been reported very widely because it had been buried under the Cobalt Gate scandal, but when I looked into it, there had actually been quite a few articles.
The debt ratio was a staggering 1,900 percent.
The stock was under trading halt.
On Dongwoo Precision’s stock board, small shareholders were howling in misery.
Bond maturities and loan deadlines kept coming one after another, but the institutions made it clear they had no appetite for rollovers. Not only did the company fail to repay the maturing bonds, even interest payments on the existing ones were suspended.
Both the factory and the research lab were completely shut down.
The employees were still coming in to work, but they had nothing to do and were just killing time.
At this point, it was safe to say there was nothing left but collapse.
While I was reviewing the materials, I got a call from Senior Dongho.
"About the Dongwoo Precision thing I mentioned yesterday."
“Did you look into it?”
"You know it’s under a trading halt right now, don’t you?"
“Yes.”
"The corporate bonds they’ve issued so far are enormous. Even the ones that have already passed maturity and still haven’t been repaid total more than 50 billion won."
“So how much are they going for?”
"I asked a friend who works as a bond broker, and apparently they’re trading at around 10 to 15 percent of issue price. If the company goes under anyway, they’re just scraps of paper. Every institution is desperate to dump them right now."
“I see.”
I smiled to myself.
Dongho Senior asked, sounding curious.
"But why were you asking about this?"
“Well...”
Because unlike everyone expected, Dongwoo Precision wasn’t going to die.
I brushed it off.
“Someone asked me to look into it.”
"You know better than to touch junk bonds like that. If you handle the wrong one, it’ll wipe you out in a single shot."
“Got it. Thanks, Senior.”
After I hung up, I thought it over.
What if I bought a failing company’s bonds for dirt cheap, and then that company came back to life? That would open the door to recovering principal and interest in full.
If I bought at 10 percent of issue price, I could make ten times my money.
That was exactly what happened in reality.
So how had Dongwoo Precision been revived?
Because a company called XRT Semicon in Singapore had acquired it.
Once that became known, the bond prices that had fallen all the way to the floor rocketed straight back to par.
The investors who had held Dongwoo Precision’s bonds at the time made nearly tenfold returns, while the institutions that had dumped them for pennies regretted it bitterly.
“In the original timeline, that’s how it should have gone...”
But there was one thing that bothered me.
Originally, Dongwoo Precision’s liquidity crisis hadn’t happened for another year. It was only because the Primus Fund disaster, which should have erupted two years later, had blown up now that the crisis was happening now.
The timing had changed. Would XRT Semicon still step in to acquire the company the way it had before?
History had already been altered, so there was no guarantee the same sequence would unfold again. Even if they did decide to buy it, there was no way to know how long it would take.
Even in the first timeline, they had dragged out the negotiations over the acquisition price and only signed six months later.
If I bought Dongwoo Precision’s bonds now, I’d have to sit there twiddling my thumbs for six months, maybe a year, until the acquisition happened.
And that was only if the acquisition actually happened at all.
If things shifted differently from the first timeline and the company ended up collapsing, then the bonds would remain nothing but scraps of paper.
So the smart thing would be to avoid touching something like this altogether...
“But that’d be a little too wasteful.”
According to Dongho Senior, because of the Primus Fund mess, institutions were busy dumping their bad bonds. That meant the prices of junk corporate bonds had fallen, and it was even possible to buy them in large quantities all at once.
It was the perfect product to invest in right now.
“Come to think of it, XRT Semicon acquiring them is actually the real problem.”
Right now, nobody knew this except me, but Dongwoo Precision would become an indispensable company in the semiconductor industry within three years.
No, that was putting it too mildly. It wouldn’t be an exaggeration to say this company would change the history of semiconductors themselves.
Wasn’t there a better way?
If history was already changing because of me, maybe I should just twist it even further.
“Instead of sitting here waiting for the acquisition to happen, wouldn’t it make more sense for me to step in and make the acquisition happen myself?”
It was a change in perspective, I supposed.
Once I thought of it that way, one method after another began to surface.
After roughly sketching out a plan in my head, I picked up my phone and called someone.