This article was published on March 5, 2025, at 3:49 p.m. on the ChosunBiz MoneyMove site.
As Homeplus, the second-largest hypermarket in South Korea, initiates corporate rehabilitation proceedings, the outcome of negotiations between its major shareholder MBK Partners and primary creditor Meritz Financial Group has become crucial. Meritz holds most of the financial sector exposure (exposure amount) toward Homeplus, totaling 1.4 trillion won, accounting for 1.2 trillion won.
The industry is watching how much MBK can reduce the interest rate for Meritz, which is in the 10% range. Meritz has no choice but to accept conditions such as interest rate reduction and extension of principal and interest repayment deadlines. If the rehabilitation plan is annulled without Meritz's consent as the primary creditor, it could significantly impact operations and decrease collateral value.
Of course, the fact that the loan-to-value ratio (LTV) is only 25% is expected to work in Meritz's favor. Given that there is almost no possibility of principal loss, it can exert negotiation power in debt adjustment. Both sides seem to have advantageous positions, so negotiations are expected to be intense.
◇ “Cash will run out in two months”; rehabilitation application and approval are expedited
On the 5th, according to investment banks and the legal community, Homeplus received a decision to initiate corporate rehabilitation proceedings from the Seoul Bankruptcy Court the day before. This decision came on the same day as the application, marking an unprecedented occurrence.
An investment banking industry source noted, “While most rehabilitating corporations knock on the court's door when they can no longer pay creditors and workers by rolling over debts with bills, in Homeplus's case, it proactively applied for rehabilitation while having cash reserves and sufficient collateral asset value, which led to the swift decision to initiate proceedings.”
It is reported that Meritz had no prior knowledge of this rehabilitation application. An MBK representative stated, “The credit rating dropped on the 28th of last month, and we suddenly decided on rehabilitation during the holiday, so we couldn't even prepare a draft,” adding, “There was no prior communication with Meritz.”
So far, Homeplus has raised 600 billion to 700 billion won each month through asset-backed securities (ABS) to meet operational costs. In this situation, both Korea Ratings and Korea Credit Ratings downgraded Homeplus's short-term credit rating from A30 to A3-, making refinancing in the domestic capital market nearly impossible. The A3- short-term credit rating is assessed equivalently to a BBB- credit rating in the long-term corporate bond market, and if it drops one more level, it becomes a junk bond level (BB+). This led MBK to explain that even if there are no immediate problems, cash could run dry in two months, prompting the sudden decision to pursue rehabilitation.
◇ Success of rehabilitation depends on Meritz
The entity in a difficult position due to Homeplus's rehabilitation decision is Meritz Financial Group. Currently, exposure amounts related to Homeplus's loans and guarantees in the domestic financial sector total 1.4 trillion won, with 1.2 trillion won lent by Meritz Securities, Meritz Fire and Marine Insurance, and Meritz Capital. In May of last year, Meritz acted as the sole underwriter at the time of refinancing the acquisition finance for Homeplus, and the interest rate is reported to have been set around 10%.
An investment banking industry source commented, “Meritz has earned a tremendous amount of interest through high-interest loans, but such aggressive operations have ironically become a poison for them,” adding, “The postponement of principal and interest payments has resulted in funds being tied up for the time being, and they have no choice but to drastically reduce the interest rate.”
It is not an exaggeration to say that Meritz holds the key to the success of Homeplus's rehabilitation. Homeplus is planning to submit a rehabilitation plan to the court by June 3, but it must be approved at a creditors' meeting beforehand. For secured creditors, more than three-quarters must agree, and for unsecured general rehabilitation creditors, more than two-thirds must agree to meet the approval condition. With 1.2 trillion won of the total collateralized bonds (including commercial papers) of 2.1 trillion won belonging to Meritz as the first-ranking creditor, if Meritz does not agree, the rehabilitation plan will be rejected.
MBK is expected to propose to lower the acquisition finance interest rate, which is near 10%. Once the rehabilitation process begins, a comprehensive stay order will be issued, postponing the repayment of borrowings and interest, which means there is a possibility that Meritz may not receive any interest at all in the worst-case scenario. Homeplus only needs to repay wages of workers and commercial claims classified as public interest bonds among the rehabilitation debts first. The money borrowed from Meritz does not have repayment priority.
◇ Lowering interest rates may avert the 'worst case scenario' for both sides
What if Meritz does not agree to lower interest rates? In that case, the rehabilitation plan will be annulled. This means it will legally revert to a state of having 'not applied for rehabilitation.' Kim Chang-gwon, an attorney at Hwawoo Law Firm, explained, “Even if the rehabilitation plan is annulled, it does not immediately lead to bankruptcy, but the market will likely view Homeplus as a ‘company that entered rehabilitation and failed,’” emphasizing that this could ultimately adversely affect its operations.
If operations are disrupted, there is a high likelihood that Meritz's collateral, namely the property value of Homeplus, will decrease. Another rehabilitation specialist attorney remarked, “Meritz is confident that they have a lot of collateral, but if Homeplus's operations falter and the supply chain is disrupted, the company will be in ruins, which will ultimately lead to a sharp drop in collateral value,” adding, “In some outlying areas, if a supermarket is demolished, the land value could drop to 10-20% of the original appraisal value.”
If rehabilitation fails, industry insiders explain that it is not realistically easy for Meritz to forcibly sell Homeplus's real estate assets. A rehabilitation lawyer stated, “If there is a secured creditor above the major shareholder, there are employees above the secured creditors,” questioning whether Meritz could forcefully dismiss employees and sell the property. Ultimately, this means that it is in Meritz's best interest to agree to the rehabilitation plan to ensure Homeplus continues its normal operations.
However, there are analyses suggesting that currently, Meritz holds negotiating power. The collateral property value is nearing 5 trillion won, resulting in a fairly low LTV of 25%. Attorney Kim Chang-gwon stated, “Generally, if sufficient collateral is secured, even if the collateral value drops to a certain extent, the principal can still be recovered, so they have the leverage to withstand it by saying, ‘If need be, we can execute our rights and recover our money.’”