Homeplus Faces Unclear Bond Repayment Prospects
Issuance of Commercial Papers and Electronic Short-term Bonds Worth 29 Billion Won Last Month
Enterprise Rehabilitation Application Filed Following Credit Rating Downgrade
Individual Investors Face Potential Losses of Billions
MBK Representatives Say “Assets Exceed Liabilities”
Union Criticizes “MBK for Essentially Retrieving Only Investment Funds”
Criticism of “Classic Case of Moral Hazard” Also Arises
Lee Bokhyun Stresses “Need to Prevent Timemap Crisis”
CJ Foodville and CJ CGV, Shilla Duty-Free, and other distribution industry sectors have stopped accepting HomePlus gift certificates, which has entered into a corporate rehabilitation process, to preemptively avoid potential redemption delays.
The storm following HomePlus, the country’s second-largest supermarket chain, entering rehabilitation proceedings is intensifying. Just ten days before applying for corporate rehabilitation, HomePlus was found to have issued short-term bonds worth several billions of won, raising concerns about investor losses across institutions and individuals.
There is also rising accountability directed at MBK Partners, the major stakeholder of HomePlus.
According to the financial investment industry on the 5th, HomePlus issued 7 billion won of commercial papers (CP) and electronic short-term bonds on the 21st of last month, with a maturity of six months. Immediately following a credit rating downgrade, it applied for corporate rehabilitation. It is under suspicion for moral hazard by raising short-term operational funds targeted at general investors right before applying for rehabilitation. HomePlus has issued 74.5 billion won in short-term bonds just this year, maturing between April to August.
The CP and electronic short-term bonds have been issued by ShinYoung Securities, Hanyang Securities, BNK Investment & Securities, and sold to other securities companies and financial institutions. Due to initially low credit ratings, interest rates were high at the 6% level.
The financial industry estimates that most of the supplies were sold in the retail sector targeting individuals and corporations, as large institutions with strict investment guidelines were not suitable due to high risks.
The potential for unclear bond repayments following the commencement of rehabilitation proceedings raises concerns for individual investors. This contrasts with major institutional investors of HomePlus, who successfully recouped their funds. Last year, MBK Partners refinanced an acquisition finance loan for HomePlus of 1.3 trillion won with Meritz Financial Group, repaying banks and existing institutional investors.
Through asset sales, MBK has been recovering its investment. Secured guarantees were given to institutions like Meritz Financial to prevent losses. However, there’s a risk exposure structure for some small-scale institutional and individual investors.
There are investors ranked lower than bond investors due to subordination. Institutional investors like the National Pension Service are expected to incur massive losses.
In September 2015, when MBK acquired HomePlus, Korea’s second-largest market operator, 700 billion of the 6 trillion won required was raised through redeemable convertible preferred stocks (RCPS) issued by a special purpose entity (SPC) formed to acquire HomePlus. The condition for the RCPS issuance back then was reportedly a 5-year maturity with a 3% dividend and an annual compound interest rate of 9% YTM (Yield to Maturity). The National Pension Service invested 600 billion won, while other local institutional investors invested approximately 100 billion won.
HomePlus is expected to prioritize repayment in the order of ‘secured creditors-unsecured creditors-SPC-issued RCPS investors-SPC-investing institutional investors’ moving forward. SPC investors and sponsors are fundamentally classified as subordinate to creditors since they are investing in the parent company, SPC.
The industry expects that if HomePlus sells assets to make payments, aside from the secured creditors like Meritz Financial Group, many will incur losses due to its inability to cover interests from operating profits (Interest Coverage Ratio of 0.7 based on EBITDA).
If this scenario unfolds, RCPS investors and institutional investors who invested approximately 2.5 trillion won in SPC equity are likely to experience losses.
MBK representatives assert, “The company has more assets than liabilities, so the principal of financial debt won’t be impaired,” explaining that “as long as financial obligations such as interest and rent are delayed for just a month through rehabilitation, the company will accumulate surplus cash of about 100 billion won through operations, meaning debt will be paid according to order when the company normalizes.” Once the company stabilizes, HomePlus’s corporate value is expected to rise, enabling returns to investors such as the National Pension Service through dividends or asset sales.
However, HomePlus’s labor union argues that “HomePlus has been thoroughly ruined by majority shareholder MBK’s irresponsible management,” urging urgent government intervention. A union representative pointed out, “This crisis with MBK arose from greed,” continuing, “MBK has focused solely on retrieving their investments, maintaining dividends to RCPS despite HomePlus’s financial problems, and not honoring the 1 trillion won investment promise.” The union fears store closures and massive layoffs owing to this rehabilitation process.
Criticism also emerged regarding MBK’s neglect in preparing self-help measures as a majority shareholder. An industry source pointedly remarked, “MBK’s abrupt application for corporate rehabilitation without fundamentally improving HomePlus’s financial structure is a classic case of moral hazard.”
Financial Supervisory Service (FSS) Governor Lee Bokhyun stated regarding HomePlus’s corporate rehabilitation proceedings that “HomePlus has been monitored due to poor financial structure and significant operating losses over several fiscal years,” and mentioned potential issues with invoices related to accounts receivable collaterals. After meeting with securities company CEOs, Lee stated to journalists that “the financial industry’s exposure (risk exposure) is at a manageable level,” but “although the court allowed transactions with commercial creditors, some payment settlement issues may arise with certain trading companies, which are currently being monitored.”
He also hinted at changes regarding private equity fund (PEF) acquisitions of companies, explaining that “research on various issues related to the control of industrial capital by financial capital is underway, and results will be reviewed with the Financial Services Commission based on the study outcomes expected in the first half.”