Homeplus' court rehabilitation catches NPS, Meritz off guard

A person on a bicycle rides past a Homeplus store in Seoul, Tuesday. Yonhap

The National Pension Service (NPS), which co-invested in Homeplus with MBK Partners, and Meritz Financial Group, which has lent money to the supermarket chain, are on edge as the retailer has entered court-led rehabilitation proceedings after struggling to secure cash amid liquidity concerns, industry officials said Wednesday.

The NPS invested 600 billion won ($416 million) in the private equity firm's acquisition of the discount store chain, while Meritz provided it with 1.2 trillion won in loans.

Homeplus filed for rehabilitation with the Seoul Bankruptcy Court on Tuesday after its corporate bond rating was downgraded from A3 to A3- on Friday. The court approved the rehabilitation proceedings soon after the application was submitted.

Typically, when a company enters rehabilitation proceedings, all debts and liabilities are frozen.

An NPS official declined to comment on the details regarding the issue, saying, “We cannot disclose our stance on the companies we have invested in.”

However, industry insiders pointed out that this development is likely to be awkward for the pension operator, as it will probably face criticism over its investment strategy.

“Of course, investments can result in gains or losses. However, in this case, MBK initially acquired Homeplus with a significant amount of leverage (debt),” an official in the investment industry said. “Given what has transpired since, this court-led rehabilitation seems less like an unavoidable natural disaster and more like a strategic failure. From an investor’s perspective, it is far from a favorable situation.”

A person is seen at a Seoul office of the National Pension Service, Jan. 31. Yonhap

MBK acquired a 100 percent stake in Homeplus from British retail giant Tesco in 2015 for some 6 trillion won. Of this amount, about 3.2 trillion won was raised through funds, including contributions from co-investors and a preferred stock fund, while around 2.7 trillion won was secured through acquisition financing loans.

This leverage has become a significant burden on the operations of the supermarket chain. Despite efforts to improve profitability by cutting costs and selling stores, principal repayments and interest expenses are offsetting operating profits.

The downturn in the retail industry further strained the company’s financial situation, and MBK has been unable to exit for 10 years.

Meritz Financial Group, which loaned 1.2 trillion won to Homeplus, is also facing challenges.

Last year, the three Meritz affiliates — Meritz Securities, Meritz Fire & Marine Insurance and Meritz Capital — extended a senior bank loan of 1.2 trillion won to Homeplus.

At the time, the retailer provided beneficiary certificates from a trust contract with a real estate trust company as collateral. This trust contract currently manages the real estate and tangible assets of the retailer as trust property.

Regarding concerns over fund recovery, a Meritz Financial official said that since the trust’s collateral is valued at approximately 5 trillion won, there will be “no issues” in recovering the firm’s funds of 1.2 trillion won.

“All of Homeplus’ real estate assets have been pledged as collateral under the trust, and Meritz holds the first-priority beneficiary rights to it,” the official said. “The exercise of these rights is independent of Homeplus’ rehabilitation proceedings, and in the event of default, Meritz would immediately acquire the right to dispose of the collateral.”

However, industry experts noted that while the value of the collateral held by Meritz is solid, reducing the likelihood of a loss, real estate remains an illiquid asset with low convertibility. Therefore, it is not a situation where Meritz can be entirely at ease.

“The liquidity of Homeplus’ assets largely depends on the type of real estate it holds. However, it is believed that many of its properties are large buildings used for hypermarkets, mostly located in provincial areas,” another investment industry official said. “Given the current sluggish real estate market and the challenges of repurposing such properties, there are concerns about their marketability and how easily they can be converted into cash.”

Meritz Tower in Seoul / Courtesy of Meritz Fire & Marine Insurance

Homeplus’ owner, MBK Partners, is also facing an unprecedented crisis, as the situation is inevitably damaging its reputation and standing as the top private equity firm in Korea.

Additionally, its ongoing conflicts with labor unions and other Homeplus stakeholders are expected to escalate far beyond those seen during previous business restructuring and sale attempts.

For now, MBK plans to focus on stabilizing the retailer’s operations.

“The decision to initiate rehabilitation proceedings for Homeplus was necessary to mitigate potential short-term financial pressures caused by its credit rating downgrade and to maintain business stability,” an MBK official said. “Recognizing the importance of safeguarding the interests of Homeplus employees and business partners, we chose to support the management’s move to enter rehabilitation.”

A Homeplus official stated that despite the rehabilitation filing, all operations — including its hypermarkets and online channels — will continue as usual. The official also said transactions with partner companies will proceed without disruption.

Meanwhile, Lee Bok-hyun, governor of the Financial Supervisory Service, stressed that the financial sector’s exposure to the retailer’s corporate rehabilitation proceedings is manageable.

“Due to the nature of the retail industry, there are various real estate assets, and it is unlikely that the financial sector will face large-scale losses,” Lee told reporters on Wednesday. “After analyzing individual companies, it seems that the potential impact is not significant. We are reviewing contingency plans based on past cases, but since operations are still running normally, it would be premature to make any definitive statements.”

Regarding acquisitions by private equity funds, Lee said the financial watchdog is awaiting the results of research on issues related to financial capital controlling industrial capital.

“The results will be available in the first half of the year, and based on that, we will review any necessary matters with the Financial Services Commission,” he said.