CJ Group refuted the corrective order and 6.5 billion won penalty surcharge issued by the Fair Trade Commission on the 16th. The Fair Trade Commission claims that the total return swap (TRS) is a legitimate financial product as an alternative to a paid-in capital increase. The commission believes CJ Group used derivative instruments to improperly support its financially troubled affiliates.
A CJ Group official noted, "Such sanctions could negatively impact the capital market and corporate management," adding, "We will carefully review our response plans after receiving the resolution."
Previously, the Fair Trade Commission identified that CJ and CJ CGV supported the issuance of perpetual convertible bonds for CJ Construction (currently CJ Logistics) and Simulain (currently CJ 4DX) through TRS contracts as problematic, citing a violation of the Monopoly Regulation and Fair Trade Act.
At that time, CJ Construction and Simulain each faced capital erosion due to consecutive net losses for five and three years, respectively. The commission viewed that both companies needed to issue perpetual convertible bonds to strengthen their capital but found it difficult to independently secure funding in the market due to their financial situation.
At that time, CJ and CJ CGV signed contracts to purchase perpetual convertible bonds worth 50 billion won (CJ Construction) and 15 billion won (Simulain) with financial institutions, while simultaneously entering into TRS contracts. Although this appears to be a financial product transaction on the surface, the commission determined that it effectively constitutes a 'guarantee of payment' as the support provider assumed the risk of the issuer's insolvency.
A TRS contract generally features a structure that mutually settles gains or losses arising from the underlying assets. However, in this case, the support provider was deemed by the commission to have assumed solely credit risk without the potential for investment returns.
As a result, CJ Construction secured capital funds amounting to 51.5% of its total capital, allowing it to escape a state of capital erosion and avoid a credit rating downgrade. Simulain also secured funds amounting to 417% of its total capital, preventing market exit.
The Fair Trade Commission stated, "Formally, it is a derivative product, but in substance, it was a credit enhancement act for affiliates," adding, "It is significant as the first case of identifying unfair support disguised as a regular financial transaction."