The Korea Development Bank has created a white paper regarding the investment loss situation amounting to $130 million (approximately 190 billion won) related to Meilan International Airport in Hainan Province, China. This is to be used as a reference for preventing such large-scale policy fund losses in the future.
According to the financial sector on the 24th, the Korea Development Bank has drafted a white paper reviewing the investment background and the overall response situation of Meilan International Airport Corporation. The bank invested in the Meilan International Airport expansion project, part of China’s land and maritime Silk Road strategy 'Belt and Road Initiative', in July 2017 but lost its investment due to the bankruptcy of Hainan Group.
The Board of Audit and Inspection pointed out last month that the Korea Development Bank's investment risk review of Meilan International Airport Corporation was inadequate. According to the audit report released by the board, the bank was aware in January 2017, six months before the investment, that the exposure of the group and its affiliates related to Meilan International Airport Corporation was about 6.79 billion yuan (approximately 1.2 trillion won), yet it proceeded with the investment.
Moreover, a month prior to sending the investment funds, the China Banking and Insurance Regulatory Commission issued an investigation order against Hainan Group, which had been engaged in aggressive overseas mergers and acquisitions, but the Korea Development Bank created an internal report stating that 'the project is unrelated to the risks of Hainan Group' and went ahead with the investment. Ultimately, Hainan Group declared bankruptcy in January 2021, and the Korea Development Bank wrote off the investment losses in March.
The Korea Development Bank will also revise the 'private equity fund (PEF) operational handling guidelines' to strengthen risk management. A key aspect will be the mandatory inclusion of potential risk factors such as laws and tax policies of the target country, as well as information regarding related companies in the credit approval application.
The Korea Development Bank also added 'control over investment funds' and 'appropriateness of overseas remittance' to the critical checklist for overseas investments, which includes declarations of expiration of benefits (EOD, where the loan is recalled by the main lender before the due date) and authority over management rights and sale of investment targets. This adjustment is interpreted as a response to the criticism that when the investment in Meilan International Airport Corporation was made, the voting rights for the final stage of the fund, where the investment money was being remitted, were solely given to Hainan Group's intermediate holding company, meaning the Korea Development Bank did not have control.
However, the Korea Development Bank continues to emphasize that the insolvency of Meilan International Airport Corporation was not predictable. The bank stated, 'This was due to the liquidity crisis faced because of the downturn in the air transport industry caused by COVID-19, which was not something that could be anticipated in advance.'