Chairman Kim Byungjoo Avoids Arrest, but Homeplus Rehabilitation Faces Obstacles

Homeplus Proposes Joint Contribution by Meritz, MBK, and KDB
Focus Shifts to Largest Creditor Meritz

The immediate crisis in the Homeplus rehabilitation process has been alleviated for now, as key executives involved in the 'Homeplus incident,' including Kim Byungjoo, Chairman of MBK Partners, have avoided arrest. However, the core challenges of securing funding and persuading creditors remain unresolved, making the path to normalizing Homeplus still extremely difficult.

According to investment banking sources on January 15, the Seoul Central District Court rejected arrest warrants for all four individuals, including Chairman Kim and Vice Chairman Kim Kwangil (Co-CEO of Homeplus), after holding pre-arrest interrogations the previous day. The court stated, "Based on the evidence submitted so far, there is insufficient suspicion to justify detention." The executives are accused of issuing a large volume of Asset-Backed Short-Term Bonds (ABSTB) despite anticipating a credit rating downgrade for Homeplus, and then abruptly applying for corporate rehabilitation, causing losses to creditors.

Whether or not these executives would be detained was of utmost interest. Had Chairman Kim, the key decision-maker, and Vice Chairman Kim, the Homeplus rehabilitation manager, been arrested, there would have been a vacuum in the decision-making authority for Homeplus's rehabilitation. This would have inevitably led to delays in supplementing the rehabilitation plan and in negotiations with creditors and investors.

MBK released a statement saying, "MBK and Homeplus have made responsible decisions to normalize the company through rehabilitation, and we will continue to do our utmost for the company's normalization."

However, the situation remains challenging. Homeplus is currently facing a severe liquidity crisis. As a solution, it has proposed a 300 billion won Debtor-in-Possession (DIP) loan. A DIP loan is a form of financing for companies under court receivership to secure operating funds, and it holds the highest repayment priority. Within the industry, it is often referred to as the 'last lifeline' for companies in rehabilitation.

The plan presented by Homeplus involves MBK, its largest creditor Meritz Securities, and a state-run financial institution each contributing 100 billion won. Due to the nature of private equity funds, MBK does not have 100 billion won in cash to provide immediately for the DIP loan, so it plans to offer a payment guarantee and participate by borrowing from Meritz and other financial institutions. In this scenario, Meritz Financial Group's participation in the DIP loan could reach up to 200 billion won.

Inevitably, attention is focused on Meritz Securities, the largest creditor. Meritz Securities holds an outstanding loan balance of about 650 billion won to Homeplus, making it a key creditor. If Meritz Securities participates in the DIP loan, it will take on additional risk, and the fact that DIP loans have repayment priority over existing debt is also a concern.

Currently, Homeplus is in such a severe liquidity crunch that it is behind on various taxes and utility payments and is unable to pay employee salaries properly. If the DIP loan is executed, it could provide much-needed relief. However, if it fails, Homeplus may be forced to accelerate store closures to secure operating funds, which could face opposition from political circles and the Homeplus labor union, who are against store closures and sales.

Nevertheless, Meritz Securities cannot easily withdraw. If the Homeplus rehabilitation fails and leads to liquidation, significant social repercussions are expected, and criticism may also be directed at Meritz Securities. Accordingly, the creditors' council-comprising Meritz Securities, Meritz Fire & Marine Insurance, Meritz Capital, Lotte Card, KB Kookmin Bank, and Korea Credit Guarantee Fund-recently informed the Seoul Bankruptcy Court that a review is needed regarding the feasibility of the DIP loan, including its interest rate, collateral requirements, and other funding conditions.

The Seoul Bankruptcy Court is currently gathering opinions from creditors on the rehabilitation plan submitted by Homeplus on December 29. The first round of opinions from creditors and other stakeholders was collected by January 6. A comprehensive review is scheduled for February or March. The court receivership period for Homeplus is set until September.

The court will decide whether to approve the rehabilitation plan based on creditor consent. Approval requires agreement from at least three-quarters of secured creditors and two-thirds of unsecured creditors. If the plan is approved, Homeplus will be guaranteed a rehabilitation period of about three years. If it is rejected, the court may either grant compulsory approval or terminate the rehabilitation process and shift to bankruptcy and liquidation proceedings.