Farm Hannong Raises 120 Billion KRW Through Receivables Securitization for NongHyup Holdings

Securing Operating Funds by Pledging Pesticide Supply and Receivables
Diversifying Financing Methods Amid High Interest Rates

Farm Hannong, an agricultural materials company that is a 100% subsidiary of LG Chem, will supply pesticides to Nonghyup Economic Holdings and securitize the accounts receivable to raise 120 billion KRW in funds. This move is interpreted as an effort to diversify funding sources while reducing the burden of working capital amid a return to net losses last year.

According to the investment banking (IB) industry on the 11th, Farm Hannong recently agreed to transfer accounts receivable worth 50 billion KRW to a special purpose company (SPC) established under the sponsorship of Shinhan Bank. The SPC plans to issue securitized notes with an 8-month maturity using the 50 billion KRW worth of accounts receivable acquired from Farm Hannong as underlying assets (a type of collateral). The SPC paid the investment funds received from the securitized note investors to Farm Hannong. In effect, Farm Hannong raised about 50 billion KRW by transferring accounts receivable to the SPC.

The accounts receivable transferred to the SPC are all payments that Farm Hannong will receive in the future for supplying pesticides and other products to Nonghyup Economic Holdings. When Nonghyup Economic Holdings repays the purchase liabilities to the SPC, the SPC uses that money to pay principal and interest to the securitized note investors. Farm Hannong agreed with Shinhan Bank at the end of February to transfer a total of 120 billion KRW worth of accounts receivable by December this year. Through this method, an additional 70 billion KRW in funds will be sequentially raised by December.

Farm Hannong maintains a fixed long-term trading relationship with Nonghyup Economic Holdings, so accounts receivable from Nonghyup are generated steadily. Nonghyup Economic Holdings purchases pesticides and fertilizers from Farm Hannong and supplies them to local farms. Farm Hannong’s dependence on Nonghyup sales is increasing. In the case of pesticides, Nonghyup acquires them through bidding and supplies them to farmers or distributes them through general wholesale and retail (market) channels. However, the proportion of distribution through Nonghyup is overwhelmingly increasing.

Farm Hannong is at a disadvantage in price negotiations with Nonghyup, while relying mostly on imported raw materials, making it vulnerable to exchange rate and raw material price volatility. The proportion of raw material costs in the cost structure is quite high, reaching 70-80%. Even if the dollar value or raw material costs rise in the short term, it is difficult to pass these increases on to the supply prices of fertilizers or pesticides. Recently, the burden on funds has increased due to rising raw material costs and exchange rates. Last year’s performance also turned to a net loss.

Nonghyup Economic Holdings, a major customer, has the highest credit rating in Korea. From Farm Hannong’s perspective, it is a high-quality asset that can serve as collateral in the capital market. Farm Hannong has consistently utilized accounts receivable securitization as an alternative to corporate bond issuance by leveraging this advantage. An IB industry official said, "Farm Hannong uses corporate bond issuance and loans from Nonghyup Bank as its main funding sources," adding, "It will continue to use accounts receivable securitization to diversify liquidity securing methods while reducing the burden of working capital."