MBK Partners, facing increasing scrutiny over its highly leveraged acquisition of Homeplus Co., has pledged to go all-out to restore the struggling hypermarket chain’s operations through a court-led rehabilitation process, MBK Partners Vice Chairman Kim Kwang Il said in an interview with The Korea Economic Daily on Tuesday.
He also reaffirmed the PE firm’s stance that the decision to file for corporate rehabilitation with the Seoul Bankruptcy Court is a “preemptive measure” aimed at preventing a potential liquidity crisis.
MBK, one of the world’s leading North Asia-focused private equity firms with $315 billion in capital under management, wholly owns Homeplus after acquiring the latter in 2015 for about 6 trillion won ($4.1 billion) from British retailer Tesco Plc in what was at the time its biggest acquisition and the largest leveraged buyout (LBO) transaction in Asia.
MBK financed the deal with 3.2 trillion won in equity and the remaining 2.7 trillion won through acquisition financing, according to MBK.
On Tuesday, Homeplus filed for a court-led rehabilitation program after credit rating agencies downgraded its corporate bonds and commercial paper ratings to a level that could trigger the mandatory early repayment of some loans.
The following is an edited transcript of the interview with Vice Chairman Kim.
▶ Homeplus’ credit rating is still technically investment grade. Why does MBK pursue court-led rehabilitation now?
“Homeplus generates about 10 trillion won in sales. However, due to the time lag between sales and payments, we typically face a void of around 600 to 700 billion won. Retailers sell products daily, but payments are often settled at the end of the month. Under Tesco’s ownership, Homeplus covered this gap through commercial paper issuances, and we’ve followed the same practice for the past decade. Unfortunately, this practice affects credit ratings.”
▶ Is it impossible to issue CPs with the A3 minus rating? (Last week, Korea Investors Service Inc., a Moody’s affiliate, cut the credit rating of Homeplus’ corporate bonds to A3 minus from A3)
“Technically, we can issue CPs with the A3 rating but practically it’s almost impossible. There’s very little appetite in the market for A3 minus-rated commercial paper, especially given the current grave economic condition. Not much. Instead, repeated CP issuance would quickly drain our cash. Bankruptcy is not imminent but if we don’t act within the next two to three months, the situation could escalate into a bigger crisis.”
“Without refinancing options, our ability to cover day-to-day expenses — including payroll — could be jeopardized. If we wait until that point to file for court protection, it would be too late. By taking proactive action now, we can secure the ability to repay short-term loans. Without taking any action, Homeplus could fail to pay businesses. A court-led rehabilitation will freeze our financial liabilities to creditors, allowing us to save some cash.”
▶ It must not be an easy decision for a PE firm to file for court protection, especially with the ongoing legal dispute between MBK and Korea Zinc, which could influence this decision.
“I think our dispute with Korea Zinc could have some negative impact. But we simply don’t have the luxury of waiting for the Korea Zinc ruling. Once we are forced to file for court receivership at the last minute, Homeplus will be the one taking a huge blow. Our decision was based entirely on Homeplus’ current situation and the need to act swiftly to protect the business – not on any strategic considerations related to Korea Zinc.”
▶ What could MBK Partners lose during the (Homeplus) rehabilitation process?
“What would happen to (Homeplus) if we just stood by and let (Homeplus) collapse? We have already witnessed what happened during the TMON, WeMakePrice’s delayed payment debacle. They were forced to go under at the last minute …. We’re not throwing in the towel – our primary goal is to get Homeplus back on track.”
▶ What happens next?
“Once the court accepts Homeplus into the rehabilitation process, all financial liabilities are frozen. The onus is on the court. The court has to decide.”
▶ Some critics say MBK’s management of Homeplus has been a failure. How do you respond?
“Under MBK’s ownership, the company (Homeplus) has steadily improved its financial health. Even last year, when our rivals saw declining sales, we (Homeplus) posted a 2.6% gain in revenue. Our online shopping sales also grew by roughly 10%. That said, everything takes time. We have been seeking to sell off Homeplus Express, which needs time. It’s understandable, given the market’s heightened sensitivity after the TMON, WeMakePrice fiasco but I wish credit rating agencies could have waited.”
By Da Eun Choi and Jun-Ho Cha
max@hankyung.com
Sookyung Seo edited this article.
