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Homeplus’ debt restructuring unlikely to proceed smoothly: experts
Investors, who suffered losses after purchasing Homeplus asset-backed short-term bonds, stage a protest in front of the Financial Supervisory Service in Seoul, Wednesday, demanding that their investment be recognized as trade receivables following the retailer's entry into corporate rehabilitation proceedings. Yonhap
By Jun Ji-hye
MBK head Michael ByungJu Kim summoned to Assembly for inquiry
Homeplus’ debt restructuring process, following its entry into the corporate rehabilitation scheme, may not proceed smoothly due to the increased proportion of indirect financial liabilities, market experts said Wednesday.
Korea’s second-largest discount store chain applied for rehabilitation proceedings on Feb. 4, citing a proactive approach to addressing liquidity shortages following its credit rating downgrade. The court approved the application on the same day.
Its management must submit a rehabilitation plan to the court by June 3 after consulting with creditors.
Hana Securities said in a report that although Homeplus seemed to have eased its acquisition financing burden, which was incurred when private equity firm MBK Partners acquired the company, by selling assets, this was not actually the case.
“Instead, Homeplus has been leasing back the stores it sold, effectively converting its debt from general borrowings to lease liabilities,” analyst Kim Sang-man said, emphasizing that the retailer’s debt structure is more complex than it appears.
MBK acquired a 100 percent stake in Homeplus from the British retailer Tesco for 6 trillion won ($4.1 billion) in 2015, and nearly half of the total cost, about 2.7 trillion won, was raised through acquisition financing via loans from the banking sector.
This debt has since become a lingering burden, prompting the private equity firm to begin selling off the retailer’s assets one by one.
The Hana Securities analyst noted that in the process of acquiring the stores sold by Homeplus, factors such as the capital raised by real estate investment funds like REITs and financial loans, as well as the exposure of construction companies involved in project financing for the redevelopment of promising locations must be considered.
“The increased proportion of indirect financial liabilities suggests that Homeplus’ debt restructuring may not proceed smoothly,” he said.
According to the report, the company’s lease liabilities amounted to 3.85 trillion won as of the February 2024 fiscal year-end.
A Homeplus store in Seoul, Sunday / Yonhap
After Homeplus filed for corporate rehabilitation, MBK faced criticism for irresponsibility, with critics arguing that the decision was made without sufficient self-rescue efforts.
Concerns have also arisen over potential losses for retail investors, as the discount store chain continued selling commercial papers and other financial instruments not only to corporations but also to retail investors right up until the filing.
Amid growing controversy, the National Assembly’s National Policy Committee has summoned Michael ByungJu Kim, chairman of MBK Partners, and Kim Kwang-il, a partner at MBK Partners and co-CEO of Homeplus, as well as Homeplus co-CEO Joh Ju-yeon and Shinyoung Securities President Geum Jeong-ho, for an emergency inquiry next Tuesday.
Rep. Lee Jung-mun of the main opposition Democratic Party of Korea claimed that the Homeplus crisis is not merely a case of management failure but a consequence of “predatory private equity practices.”
“We will thoroughly examine MBK’s role in this situation, as the firm has long claimed to pursue responsible management,” Lee said during a party meeting.
Rep. Kim Nam-geun of the same party raised suspicions about the sale of commercial papers to retail investors just a week before the rehabilitation filing, noting that criminal complaints from affected investors seem inevitable.
The National Tax Service (NTS) is also increasing pressure on the private equity firm by launching a tax investigation. According to industry sources, the NTS has recently dispatched personnel to the company to conduct the audit.
An MBK official said this tax investigation is a routine audit, typically conducted every four to five years.
However, given the ongoing controversy over MBK’s moral hazard regarding the Homeplus situation, it is widely speculated that the investigation will be conducted at a special audit level to examine whether taxes were properly reported during the sale of the retailer’s stores and whether any tax evasion occurred.
In 2020, MBK was ordered by the NTS to pay 42 billion won in additional taxes over offshore tax evasion on an income of 100 billion won.
Meanwhile, some securities firms, including Shinyoung Securities, are reportedly considering filing a criminal complaint against Homeplus on fraud charges based on the belief that the retailer sold short-term securities through brokerage firms despite anticipating corporate rehabilitation, thereby causing losses to investors.