NH Nonghyup Bank Leads 150 Billion KRW Private Bond Issuance
Affinity Equity Conducting Due Diligence on SK Rent-a-Car Stake Sale
Credit Uncertainty Depending on M&A Outcome
Private Bond Issuance Expected to Continue Until Deal Closure
It has been confirmed that SK Networks recently issued private bonds to raise 150 billion KRW in funds. This is interpreted as the company issuing private bonds, which do not go through a public offering process, instead of public bonds, its main funding method, due to credit uncertainty arising from the sale of SK Rent-a-Car shares.
According to the investment banking (IB) industry on the 22nd, SK Networks recently issued private bonds worth 150 billion KRW with NongHyup Bank as the lead manager. The maturity is until December of this year, when the SK Rent-a-Car share sale deal is expected to be completed. The raised funds are reportedly planned to be used for repaying maturing borrowings. NongHyup Bank acquired SK Networks' private bonds through a special purpose company (SPC) it established. Subsequently, SK Networks issued securitized bonds worth 152 billion KRW using the principal and interest of the private bonds repaid by SK Networks as underlying assets (a type of collateral) to secure loan funds.
SK Networks, which has mainly raised funds through public corporate bonds, issued private bonds due to uncertainties related to the sale of SK Rent-a-Car. In April, SK Networks selected Affinity Equity Partners, a private equity fund (PEF) operator, as the preferred negotiation partner for the sale of SK Rent-a-Car's management rights and signed a memorandum of understanding (MOU) for the stock sale. The sale target is 100% of SK Rent-a-Car shares, with a sale amount of approximately 800 billion KRW. Affinity Equity Partners is expected to conduct due diligence (DD) on SK Rent-a-Car and finalize price negotiations before signing a stock purchase agreement (SPA) for SK Rent-a-Car.
However, it is not possible to rule out the possibility that the sale negotiations may fail during the due diligence or stock sale negotiation process. Both SK Networks and SK Rent-a-Car, the sale target, are in a situation where their credit ratings could change depending on how this M&A proceeds. Therefore, it is expected that SK Networks will raise necessary funds through private bonds or loans instead of public bonds until the sale of SK Rent-a-Car shares is confirmed.
Credit rating agencies view that once the sale of SK Rent-a-Car is completed, SK Networks' business and profit base will weaken. SK Rent-a-Car accounts for about 15.3% of SK Networks' total consolidated sales and about 36% of operating profit. After the share sale, sales and profit scale could decrease accordingly. Conversely, if the sale proceeds are mainly used to repay borrowings, it would have the effect of improving the financial structure. Since there are both financial gains and losses, it is difficult to predict the direction of credit rating after the sale.
On the other hand, SK Rent-a-Car's credit rating is expected to be downgraded by one notch from A+. SK Rent-a-Car's current credit rating is A+ (stable), which reflects the possibility of support from the SK Group by one and a half notches. If SK Rent-a-Car is sold to a PEF and the major shareholder changes, the possibility of support from the SK Group will disappear, which is expected to be a factor for credit rating downgrade.
A corporate bond market official said, "The financial situation and credit ratings of the two companies could vary depending on whether the share sale is successful," adding, "It is a burdensome situation for both bond issuers and investors to issue public bonds amid interest rate uncertainties." The official also said, "The SK Rent-a-Car M&A is expected to reach a final conclusion around the end of this year," and "Until then, SK Networks and SK Rent-a-Car will continue to issue private bonds to repay maturing borrowings."
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