FSS scrutiny of MBK over Homeplus sparks debate on regulatory overreach
A Homeplus store in Seoul, March 4 / Newsis
Concerns have been raised that the Financial Supervisory Service’s (FSS) move to impose severe sanctions on MBK Partners, Homeplus’ major shareholder, in connection with the retailer’s controversial corporate rehabilitation filing, represents excessive intervention by financial authorities, according to industry insiders Tuesday.
They argued that the Capital Markets Act grants institutional private equity fund managers full authority over investment decisions, and that MBK acted within its discretion under the law.
The country’s second-largest supermarket chain filed for corporate rehabilitation with the Seoul Bankruptcy Court on March 4, following a credit rating downgrade.
The financial watchdog views any infringement of the National Pension Service’s (NPS) interests during MBK’s alteration of the terms for Homeplus’ redeemable convertible preferred shares (RCPS) — changes favorable to the retailer at the time of the downgrade — as an unsound business practice.
In this context, the FSS issued a preliminary notice of severe sanctions, including a suspension of duties, to MBK. This marks the first time the financial authorities have sought such disciplinary action against a general partner managing an institutional private equity fund.
When MBK acquired Homeplus in 2015, NPS financed the deal by purchasing 582.6 billion won’s ($396 million) worth of RCPS issued by Korea Retail Investment, an MBK-controlled special purpose company (SPC).
The dispute stems from a Feb. 26 amendment to a contract between Homeplus and the SPC. The change allowed Homeplus, rather than the SPC, to decide whether to redeem its RCPS, enabling the securities to be treated as equity rather than debt. The adjustment led to a dramatic improvement in Homeplus’ financial ratios, with its debt-to-equity ratio plunging from 1,408.6 percent to 425.9 percent.
MBK said the move was intended to protect investors by stabilizing the retailer’s balance sheet and preserving its credit rating, which was under threat of downgrade.
The FSS, however, argued that by transferring the redemption right, MBK reduced the repayment priority of the SPC’s RCPS holdings, thereby damaging the value of the fund’s assets and harming the interests of NPS and other limited partners.
Some industry insiders, however, claimed that the SPC and its limited partners share the same interests — improvement in Homeplus’ financial structure — and that the redemption right in question was practically worthless under the Commercial Act, since preferred shares can only be redeemed from distributable profits after repaying all senior debt.
“The Capital Markets Act gives fund managers full authority over investment decisions,” said a legal expert who requested anonymity. “Seeking prior approval from investors like the NPS could itself have violated fund governance rules.”