Daemyung Chemical Group Acquiring Logen Delivery, Subsidiary ModaInnoChip Engages in 10% TRS Share Transaction

[Asia Economy Reporter Lim Jeong-su] Daemyung Chemical Group, which recently gained attention by acquiring management rights of Logen Delivery, has been confirmed to have entered into a Total Return Swap (TRS) transaction with investors acquiring 8 million common shares (10.03% stake) of its affiliated KOSDAQ-listed company Moda Inno Chip. A special purpose company (SPC) was set up to acquire the shares, while the investment losses and other responsibilities are borne by group affiliates Daemyung World Fashion and Daemyung Chemical. It is interpreted that the TRS transaction was made to minimize the financial burden on the group, including the major shareholder Daemyung Chemical, during the private equity fund’s (PEF) resale (exit) of the shares.

According to the investment banking (IB) industry on the 2nd, Multi Solution MDI (hereafter Multi Solution) recently issued private bonds worth 15 billion KRW underwritten by Korea Investment & Securities and received a 24 billion KRW loan (Asset-Based Lending, ABL). This was to repay the 39 billion KRW borrowed when acquiring Moda Inno Chip shares last September. Multi Solution is known to be an SPC established last September for the purpose of acquiring Moda Inno Chip shares. It was established during the exit process of the Moda Inno Chip shares acquired in 2018 by the private equity fund ‘IBK-NH Small Giant PEF,’ jointly formed by IBK Industrial Bank and NH Investment & Securities.

After acquiring a 10.03% stake in Moda Inno Chip through borrowed funds, Multi Solution signed a TRS contract with Daemyung World Fashion at the end of last month. Under the contract, if profits or losses arise from Moda Inno Chip common shares, Daemyung World Fashion will take all profits or bear all losses, while Multi Solution will receive a fixed return equivalent to the loan interest. No immediate transfer of acquisition funds occurs; instead, future profits or losses from the common shares and interest are offset and the difference is settled.

Although Multi Solution raised funds to acquire Moda Inno Chip shares, by entering into the TRS contract, it effectively produces the same economic effect as if Daemyung World Fashion took out a stock-secured loan to acquire the Moda Inno Chip shares. The structure was arranged so that the SPC takes out the loan and acquires the shares instead of Daemyung Chemical Group. From Daemyung Chemical Group’s perspective, there is no immediate financial burden.

Additionally, Daemyung Chemical, the parent company of Moda Inno Chip, has agreed to a capital replenishment obligation for Multi Solution’s borrowings. This means that if Multi Solution faces difficulties repaying the loan borrowed for the share acquisition, Daemyung Chemical will provide the necessary liquidity for repayment. Since this is a contingent liability, it is not recorded as Daemyung Chemical’s debt.

An IB industry insider said, "Daemyung Chemical is the largest shareholder holding 75% of Moda Inno Chip shares and owns a majority stake for exercising management rights, so the need for additional share acquisition is low," adding, "Daemyung Chemical has shifted the burden of share acquisition and TRS to Multi Solution and its subsidiary Daemyung World Fashion."

Through this transaction, IBK-NH Small Giant PEF succeeded in exiting with a profit of over 3 billion KRW after about three years since acquiring Moda Inno Chip shares in 2018. IBK-NH invested 35.5 billion KRW in 8 million common shares (10.03% stake) of Moda Inno Chip in 2018 as part of ‘Re-Leap Finance,’ which supports strengthening corporate competitiveness under the IBK co-financing program (3-up) for SMEs.

An IB industry insider explained, "During the three years that the PEF held Moda Inno Chip shares, the stock price fell from the 4,000 KRW range to the 3,000 KRW range, but it appears that Daemyung Chemical Group guaranteed a certain return to the PEF," adding, "Given the heavy financial burden from acquiring Logen Delivery, it would have been difficult for Daemyung Chemical Group to directly acquire the shares."

Meanwhile, Cowell Fashion, an affiliate of Daemyung Chemical Group, recently finalized a contract to acquire the delivery company Logen from Baring PEA for 370 billion KRW.