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Interest rates on acquisition financing in South Korea are set to stabilize at the 5% level, which was last seen before COVID-19 swept the world, heightening expectations that the country’s merger and acquisition market will revive.
According to sources in the Korean investment banking industry on Tuesday, a STIC Investment-IMM Private Equity consortium is said to have talked with a major local commercial bank to finance loans to buy the specialty and industrial gas unit of Hyosung Chemical Corp. at an interest rate in the low-5% level.
The consortium is a preferred bidder for a 100% stake in the specialty gas company worth 1.3 trillion won ($955.2 million), and it is expected to finance about 500 billion won to 700 billion won for the acquisition with a bank loan.
The low-5% rate is considered too low, given that the unit’s parent Hyosung Chemical’s long-term credit rating is BBB+, said an industry observer.
“But it looks highly likely that the consortium would secure fund at a rate in the 5% level,” added the source.
Acquisition loan rates in the 5% range were last seen before the pandemic hit the world.
Hyosung Chemical’s Ulsan plant
RETURN TO THE PRE-PANDEMIC LEVEL
The acquisition financing rate drastically shot up during the COVID-19 crisis. In 2020, Affinity Equity Partners refinanced debts borrowed to buy Burger King’s operations in Korea and Japan at a rate hitting 10%.
But the rate dropped to the 8% level last year, and then to the 5% level this year.
DIG Airgas Co., formerly known as Daesung Industrial Gases, and DN Solutions Co., the world’s third-largest machine tool maker, are in negotiations with lenders to refinance debts worth 1.8 trillion won and 1 trillion won, respectively, at a rate of 5.7% and 5.3%.
Lotte Card Co., the country’s No. 5 credit card issuer, and Lotte Group’s non-life insurer Lotte Insurance Co. have been actively seeking to refinance or recapitalize their debts worth 1 trillion won and 300 billion won, each, in a favorable loan rate environment.
Market observers expect the country’s acquisition loan rate will stabilize below 6% this year as major local commercial banks and securities firms are willing to lend money for acquisitions, which are considered safer loans while reducing riskier investments in equities and real estate.
ACTIVE M&A DEALS EXPECTED IN H2
The move comes in line with the Korean financial authorities’ drive to improve the value of local companies with enhanced corporate governance, financial stability and operational efficiency.
Accordingly, commercial lenders have focused on improving their asset quality by reducing riskier assets.
Institutional investors, like securities firms and non-bank financial institutions, are also capable of participating in sell-down deals thanks to their ample liquidity, triggering a race to lower rates.
With the stabilized acquisition loan rates, the Korean M&A market is projected to regain traction later this year, market analysts said.
The IB industry expects the financing rate for the acquisition of Ecorbit Co., Korea’s largest landfill company, will be set below 6%.
Bidders for Air Products Korea Inc. worth 5 trillion won and another major buyout deal SK IE Technology Co. are also expected to benefit from low rates for acquisition loans.
By Jun-Ho Cha
chacha@hankyung.com
Sookyung Seo edited this article.
