Emart and Shinsegae Construction Diversify Funding Methods with Private Bonds

Continuous Private Bond Issuance Since Early-Year Credit Rating Downgrade
Difficulties in Public Bond Issuance Due to Worsening Performance and Financial Conditions
Potential Uncertainties Related to Construction Support and SSG.com

Emart and Shinsegae Construction, subsidiaries of the Shinsegae Group, are consecutively issuing private bonds to secure liquidity. Due to overlapping sluggishness in the distribution and construction businesses, uncertainty regarding performance and financial conditions has increased, making public bond issuance difficult. As loan maturities are approaching one after another, private bond issuance by major affiliates is expected to continue.

According to the investment banking (IB) industry on the 8th, Emart issued private bonds worth 50 billion KRW with Shin Young Securities as the lead manager. The bond maturity is 7 years, and the interest rate was set at 3.89%. Considering the credit rating has fallen to AA-, the maturity and interest rate conditions are evaluated as favorable. A corporate bond market official said, "With expectations of interest rate cuts and long-term downward trends in government bond yields, Emart was able to raise funds at a relatively low interest rate despite credit pressure."

The raised funds are expected to be used to repay maturing corporate bonds. A 170 billion KRW, 3-year maturity corporate bond issued in 2021 will mature on the 11th. The shortfall will be repaid with cash on hand. The interest rate on the maturing corporate bond is in the 1% range, so due to the recent market interest rate increases and credit rating downgrade, Emart's interest expenses will rise.

Since the beginning of the year, Emart has continuously secured funds through private bonds following the credit rating downgrade. Public bond issuance, which requires procedures such as securities registration and demand forecasting, has high uncertainty in securing investor demand, so the company has chosen an alternative. After issuing 350 billion KRW worth of public bonds in February, Emart has been issuing small amounts of private bonds when there is market demand: 20 billion KRW in March, 11 billion KRW in May, and 10 billion KRW in June.

Shinsegae Construction, the group's construction company, also issued private bonds worth 35 billion KRW with a 2-year maturity and 15 billion KRW with a 2 years and 3 months maturity at the end of last month, with Eugene Securities as the lead manager. Considering Shinsegae Construction's situation, although the maturities are long, the bonds have call options allowing early redemption starting three months after issuance, so the effective maturity is short. The interest rates were set quite high at 7.252% and 7.35%, reflecting poor performance and project financing (PF) related risks.

In May, Shinsegae Construction secured large-scale liquidity by issuing 650 billion KRW worth of private perpetual subordinated bonds. The perpetual bonds were fully underwritten by NH Investment & Securities, Korea Investment & Securities, and Shinhan Investment Corp., but during this process, the major shareholder Emart provided a capital support agreement. The capital support agreement is a credit facility in which Shinsegae Construction's major shareholder commits to provide repayment funds if Shinsegae Construction faces difficulties in repaying borrowings.

Private bond issuance by major Shinsegae Group affiliates is expected to continue for the time being. This is because overall credit uncertainty has increased due to the worsening performance and financial conditions of Emart's distribution business and direct and indirect support for Shinsegae Construction.

The possibility of capital outflow related to SSG.com is also acting as a factor limiting Emart's creditworthiness. The initial public offering (IPO) of SSG.com, invested in by private equity funds (PEF) Affinity and BRV Capital, was canceled, putting Emart in a position where it must return over 1 trillion KRW. Although new financial investors (FI) were sought, it is known that total return swaps (TRS) with securities firms are currently being considered. This is a type of stock-secured loan agreement where securities firms purchase PEF-held shares on behalf of the PEF and later settle profits and losses with Emart and the securities firms.

An IB industry official said, "For Emart and Shinsegae Construction, public bond issuance will be difficult until financial uncertainties are resolved," adding, "They are expected to secure liquidity through asset sales or respond to maturing borrowings with cash on hand, private bonds, and commercial paper (CP)."