As Hypermart Homeplus unexpectedly entered the corporate rehabilitation procedure, a sense of crisis is rising in the retail industry. Homeplus stated that it was responding to potential funding issues due to its lowered credit rating, but analysts suggest that it chose the corporate rehabilitation after predicting difficulties in securing funds as its credit rating slipped below the investment-grade threshold.
The Seoul District Court decided on the 4th to open the corporate rehabilitation procedure requested by Homeplus and permitted the company to continue its business during the process. Homeplus submitted the application for corporate rehabilitation for proactive restructuring at around 12:03 a.m. on the same day and later informed the media of the fact that morning. The court made the decision to commence rehabilitation proceedings just 11 hours after interviewing the representative.
Proactive restructuring means recovering financial soundness through rehabilitation procedures when there is a concern of a funding shortage within months, even though the company is not in a state of insolvency but has an unsustainable financial structure. The court noted that Homeplus does not currently have issues related to payment, but its corporate commercial paper and short-term bond credit ratings were downgraded last month, leading to an expected increase in financing costs, and a funding shortfall is anticipated around May.
◇Second largest in the hypermarket industry, but thrown into turmoil by successive mergers and acquisitions
Homeplus is the second largest hypermarket operator in South Korea after Emart based on sales. It originated from the discount store business of Samsung C&T's distribution sector, launched in 1997. After the International Monetary Fund (IMF) crisis, in 1999, Samsung C&T sold a 49% stake to Tesco, the largest retailer in the UK, and operated as a joint venture until 2011 when Tesco bought out the remaining shares held by Samsung C&T, becoming a 100% subsidiary of Tesco.
However, after Tesco became embroiled in an accounting scandal in 2014 and suffered financial pressure due to declining performance, it was acquired by private equity firm MBK Partners in 2015. MBK formed a consortium with the Canada Pension Plan Investment Board (CPPIB), the Public Sector Pension Investment Board (PSP Investments), and Temasek to acquire 100% of Homeplus equity for 7.2 trillion won. At that time, MBK used 4.3 trillion won of the total acquisition cost for financing.
Having been re-launched with substantial liabilities, Homeplus faced deterioration in its performance due to the rapid growth of the e-commerce market, the COVID-19 pandemic, and prolonged consumer recession. As a fiscal-close company in February, Homeplus recorded an operating loss of 199.4 billion won and a net loss of 574.3 billion won for the fiscal year 2023 (from March 2023 to February 2024), marking three consecutive years of losses. At the end of November last year, total borrowings reached 5.462 trillion won with a debt ratio of 1408%.
◇MBK acquired Homeplus for 7.2 trillion won by borrowing 4.3 trillion won... struggling to repay debts
Ten years after the acquisition by MBK, Homeplus has been closing stores or implementing a sale-and-leaseback strategy to repay the borrowed funds during the acquisition process. As a result, the number of stores has decreased from 142 in 2015 to 126 now.
As sales weakened due to the divestiture of stores, performance deteriorated, and a vicious cycle of increasing financial burdens repeated itself. Consequently, Homeplus's market value also declined. Homeplus's credit rating dropped from A3+ in 2023 to A3, and recently to A3-.
When plans to recover investments through re-sales ran into hurdles, it attempted to partition and sell off more than 300 locations of its corporate supermarket (SSM) 'Homeplus Express' last year. Alibaba Group's AliExpress, Coupang, and NongHyup were mentioned as potential buyers, but no acquirers have yet been found.
Analysts also noted that risks have increased due to opposition from the Homeplus union regarding the sales. The Mart Industry Union of the Korean Federation of Trade Unions Homeplus branch has argued against major shareholder MBK, stating that 'temporary funding through store sales is not a fundamental solution' and has been engaged in protests. The Homeplus union criticized MBK for selling Homeplus's real estate to repay acquisition borrowings, stating that most operating profits are funneled into interest on borrowings and dividends on convertible preferred stocks, leaving 'only an empty shell.'
◇Short-term financial burdens alleviated, but the key is performance recovery
Credit rating agencies downgraded Homeplus's corporate commercial paper and short-term bond ratings from 'A3' to 'A3-' on the 28th of last month, citing factors such as ▲ the prolonged poor operating performance, ▲ the persistent heavy financial burden, and ▲ limited prospects for improvement in operating performance and financial structure in the medium to short term. Credit rating agencies estimate that Homeplus's debt ratio exceeds 1400%, which means its total liabilities amount to 14 times its total assets.
However, Homeplus has asserted that 'the decline in its credit rating was due to the fact that improvements such as increases in both online and offline sales and improvements in the debt ratio were not reflected in the credit rating.' As of January 31, Homeplus's debt ratio and sales for the previous 12 months were 462% and 7.0462 trillion won, respectively, showing a 1506% improvement in the debt ratio and a 2.8% increase in sales compared to one year ago. They emphasized that this rehabilitation procedure is a 'preventive measure'.
Jeong Yeon-seung, a professor at Dankook University's Business Department, stated, 'It is important whether the performance of the hypermarket, which is the main business, recovers,' adding that 'the sales strategies currently being pursued must be backed by addressing the weakened revenue base due to store sales and the associated fixed cost burdens.' This implies that relying on a debt repayment strategy dependent on asset sales is not sustainable.
Meanwhile, the court has decided to maintain the current dual leadership structure of co-representatives Jo Joo-yeon and Kim Kwang-il without appointing a separate administrator alongside the decision to open the rehabilitation procedure. The creditors' council will select advisory law firms and accounting firms related to the rehabilitation procedure and will engage in discussions to improve Homeplus's financial structure. In addition, a restructuring officer to be appointed upon the recommendation of the creditors' council will supervise the company's cash flow.
The deadline for submitting the list of creditors following the start of the rehabilitation procedure is until the 18th, the creditor claims filing period is until the 1st of next month, and the deadline for submitting the rehabilitation plan is June 3.
회생절차 개시에 따른 채권자 목록 제출 기간은 오는 18일까지, 채권 신고 기간은 다음 달 1일까지, 회생계획안 제출 기한은 6월 3일까지다.