[Interview] Attorneys Kim Kidong and Jang Jinseok of Robex Take On Private Equity Giant MBK

Why Former Chiefs of the Seoul Central District Prosecutors' Office Special Investigation Division 1,
Nuclear Power Plant Corruption Task Force, and Supreme Prosecutors' Office Anti-Corruption Task Force
Are Targeting MBK and Homeplus Securitized Bonds

The anxiety of victims who have been unable to recover their investments, amounting to 401.92 billion won, due to the 'Homeplus short-term bond crisis' is growing. Although it has been 100 days since the company entered corporate rehabilitation proceedings, there has been no clear solution to rescue the victims of asset-backed short-term bond (ABSTB) investments. It also remains unresolved whether there was fraudulent intent in the issuance process, which involved a 'very short-term card credit' rollover, or whether MBK Partners, the major shareholder, could be charged with breach of trust.

According to the legal community, it is possible to file a class action for damages, as well as criminal charges, against MBK Partners and the Homeplus management. This is because there are increasing indications that the corporate rehabilitation filing by Homeplus was questionable. However, large law firms are reluctant to get involved. It is said that they do not want to risk losing 'major clients.'

Stepping into this situation is the law firm Robex, which is known in Seocho-dong for its roster of former prosecutors specializing in finance and special investigations. Robex is home to lead attorneys Kim Kidong (Judicial Research and Training Institute class 21), Lee Dongyeol (class 22), and Kim Hugon (class 24), all of whom previously served as chiefs of the Special Investigation Division 1 at the Seoul Central District Prosecutors' Office. It is no exaggeration to say that most of the major corruption cases investigated by the prosecution in the 2000s passed through their hands.

Asia Economy spoke with lead attorneys Kim Kidong and Jang Jinseok (class 21), who are preparing a class action and criminal complaints against MBK, a giant in the private equity industry, and the Homeplus management, to hear the inside story. Attorney Kim said, "This case involves multiple issues, including the moral hazard of private equity funds and irregular asset securitization practices, so we are preparing a joint lawsuit out of a sense of duty to help the victims." The following is a Q&A.

Kim Kidong (right) and Jang Jinseok, lead attorney of the law firm Robex, are being interviewed by Asia Economy at their office in Seocho-gu, Seoul. Photo by Jo Yongjun

-What led you to take on this lawsuit?

▲ (Attorney Kim) Our law firm has extensive experience in finance and corporate crime. We have been closely examining this case since the Homeplus incident broke out in March. We have been communicating with the victims' committee and raising issues. Along the way, we realized that not many firms besides ours were willing to take on this case. Although private equity funds are involved, securities companies and card companies are also entangled, making it difficult for large law firms to get involved. The method of asset securitization itself was highly unusual. We identified structural problems and determined that this was a case that needed to proceed as a class action.

-Why do you think the Homeplus crisis occurred?

▲ (Attorney Jang) Let me outline the big picture. The issuance flow of the problematic 'Homeplus securitized bonds' was as follows: Homeplus did not pay its suppliers immediately but settled payments through 'very short-term card credit.' The card companies paid the suppliers first, expecting Homeplus to repay them later, and then sold these 'receivables' (accounts receivable) to securities companies for cash. The securities companies, in turn, transferred these receivables to a special purpose company (SPC), which repackaged them as 'bond products.' The securities companies that received these products from the SPC sold them to investors at their branches, advertising them as 'high-yield bonds with annual returns of 6-7%.' These bonds, which had relatively short maturities and high yields, were very popular in the low-interest-rate environment and sold out completely.

-What specifically was problematic about this?

▲ (Attorney Kim) The way the card companies securitized the Homeplus bonds starting in January 2023 was unusual. Credit card companies retained the card payment receivables themselves but only securitized the 'participation rights.' The SPC, which had contracted with the card companies, issued bonds based on these participation rights, and the lead securities company underwrote the entire amount at a discount rate of 6-9% per year. The bonds were then sold to general investors through retail securities companies. This method is not 'asset transfer' but 'profit participation-type' securitization. In the former case, the Asset-Backed Securitization Act applies. That is why I believe they likely chose this irregular 'profit participation-type' approach. In this structure, the SPC does not acquire the receivables themselves but obtains the right to participate in a certain percentage of the principal recovered by the card company, card usage fees, installment fees, and late fees. Legally, this is not a transfer of receivables. Economically, it is a unique form of securitization that has characteristics similar to a transfer of receivables.

-Why do you think they chose this method of securitization?

▲ (Attorney Jang) To explain that, we need to look at why the Asset-Backed Securitization Act was created in the first place. After the IMF crisis, it became important for banks to manage their soundness. They needed to dispose of bad assets, and in response, specialized securitization companies emerged. However, in such cases, they are subject to all the regulations of the Asset-Backed Securitization Act. By using a 'participation contract,' however, they can achieve the same legal effect as a transfer but with less responsibility.

-Are you saying that this structure was intended to shift losses onto general investors?

▲ (Attorney Kim) That is how I see it. On February 28, Homeplus's credit rating was downgraded from 'A3' to 'A3-,' and just four days later, the company abruptly filed for corporate rehabilitation. At the same time, the Homeplus securitized bonds became worthless. However, the credit card companies, securities companies, and SPCs involved in the structure did not suffer losses. The card companies had already recovered their payments through these bonds, thus escaping the risk of Homeplus default. As a result, investors were left to shoulder the full brunt of Homeplus's liquidity crisis.

Kim Kidong (right) and Jang Jinseok, lead attorney of the law firm Robex, are being interviewed by Asia Economy at their office in Seocho-gu, Seoul. Photo by Jo Yongjun

-Then, can these bonds be considered trade receivables?

▲ (Attorney Jang) The victims only hold bonds issued by the special purpose company (SPC) and, legally, cannot be considered direct creditors of Homeplus. Similarly, the SPC only has the right to participate in the cash flow from Homeplus under the participation contracts with the credit card companies, but it is not a direct creditor either. Ultimately, the creditors eligible to participate in the rehabilitation proceedings remain the credit card companies. Even if asset-backed bond investors have filed as creditors in court, their legal status remains uncertain.

-Homeplus claims it could not have foreseen the credit rating downgrade.

▲ (Attorney Kim) I find that claim unconvincing. In 2015, before MBK Partners acquired Homeplus, the company's credit rating was A1. However, the rating declined steadily after the acquisition, reaching A3- this year. The prevailing market view is that this was triggered by MBK's aggressive leveraged buyout (LBO) acquisition strategy. The practice of repaying debt by selling off prime retail locations was also problematic. A detailed analysis of accounting and financial records could pinpoint when Homeplus became aware of the risk of insolvency.

-What is the plan going forward?

▲ (Attorney Kim) In addition to filing a class action for damages, we plan to pursue criminal charges of fraud and breach of trust against MBK and the Homeplus management. We are also considering lawsuits against financial institutions such as card companies and securities companies that were involved in the bond issuance and sales process. Beyond simply seeking redress for the victims, we will do our utmost to prove the structural problems of moral hazard in private equity funds and irregular securitization practices.