[Asia Economy Reporter Lim Jeong-su] CJ Freshway, a subsidiary of CJ Group, has secured a 15 billion KRW perpetual loan through its Vietnam subsidiary (CJ Freshway Vietnam co., ltd). Although a perpetual loan is formally a loan, its economic substance is equivalent to a perpetual bond (hybrid capital securities) with no maturity. CJ Freshway supported the funding by providing a payment guarantee to the Vietnam subsidiary.
According to the investment banking (IB) industry on the 18th, CJ Freshway Vietnam subsidiary received a 15 billion KRW perpetual loan underwritten by Shinhan Investment Corp. The loan has a 30-year maturity, with the option to extend the maturity after 30 years, effectively making it perpetual. It is understood that the loan was made through Shinhan Investment Corp’s local Vietnam branch.
After the loan execution, CJ Freshway can exercise a call option (early repayment option) to repay the principal early after 3 years. If the loan is not repaid at the call option exercise date, a step-up condition applies, significantly increasing the interest rate every 3 years. Additionally, interest payments can be deferred to the next interest payment date, but deferred interest must be paid cumulatively. An IB industry official explained, "The perpetual loan is structured almost identically to a perpetual bond, with perpetual maturity, call options, and cumulative interest payment conditions."
CJ Freshway has agreed to repay immediately if the perpetual loan is not recognized as capital due to changes in accounting standards. Perpetual bonds and perpetual loans can be recognized as capital in accounting because they have perpetual maturity and less mandatory repayment compared to general borrowings. For this reason, companies often issue them to reduce debt ratios. However, as domestic and international regulators are moving to not recognize perpetual bonds issued by general companies as capital, it is uncertain how long they will continue to be recognized as capital.
CJ Freshway, which holds 100% of the shares of the Vietnam subsidiary, did not directly take the loan but only provided a payment guarantee to the Vietnam subsidiary. Accordingly, CJ Freshway and CJ, the major shareholder of CJ Freshway, will record this loan as capital in their consolidated financial statements. CJ Freshway will not recognize it as debt or capital in its separate financial statements but will only disclose it as off-balance-sheet liabilities (contingent liabilities).
CJ Group has recently been increasing funding through overseas subsidiaries of its core affiliates such as CJ CheilJedang and CJ Logistics. Large-scale perpetual bonds or redeemable convertible preferred stocks (RCPS) are issued by overseas subsidiaries, and domestic affiliates provide credit support such as payment guarantees in this process to avoid direct financial burdens.
Last year, CJ CheilJedang’s China (CJ China) and Vietnam subsidiaries each received perpetual loans of 200 billion KRW and 100 billion KRW, respectively. CJ Logistics issued 350 billion KRW worth of perpetual bonds, and its Singapore and U.S. subsidiaries also issued RCPS worth several hundred billion KRW using total return swaps (TRS).
An industry insider said, "As CJ Group’s major affiliates’ overseas subsidiaries raise large-scale funds through perpetual bonds or perpetual loans, the debt ratio and borrowing scale of the group holding company CJ and its core affiliates have significantly decreased. However, considering the scale of perpetual bonds, perpetual loans, and payment guarantees, the actual financial burden has not substantially decreased."
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