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March 2004

The Host of Restructuring Vehicles Tried in Korea. March 2004. Table of Contents. I. KAMCO and Restructuring KAMCO’s role Classification of NPLs Resolution Strategies Financial vs.Corporate Restructuring Financial Restructuring Business Restructuring. II. KAMCO’s NPL Vehicles

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March 2004

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  1. The Host of Restructuring Vehicles Tried in Korea March 2004

  2. Table of Contents • I. KAMCO and Restructuring • KAMCO’s role • Classification of NPLs • Resolution Strategies • Financial vs.Corporate Restructuring • Financial Restructuring • Business Restructuring • II. KAMCO’s NPL Vehicles • KAMCO’s Loan Sale to various purchasers • Comparison of 3 Vehicles • JV-SPC(AMC)& JV-CRC Process • Regulatory Support for NPL Vehicles • Law Changes • KAMCO Considerations • JV Foreign Investors’ Considerations • JV SPC(AMC) • JV CRC • KAMCO Vehicles: From Fire Sale to Restructuring • KAMCO JV CRC: Also acted as Stand-Alone basis • Why CRV • JV CRV vs Cooperative CRV • Establishment of JV-CRV • KAMCO JV-CRV Structure: :Diners Club • Creditors Coop-CRV Structure:Daewoo Capital • Why CRV was difficult • The future of Workout - Corporate Restructuring • Promotion Act • SK Global CPRA case: management remains

  3. KAMCO and Restructuring

  4. KAMCO’s Role in the Korean Economy • Provide liquidity and restore stability Revitalize Korean economy Resolve NPLs Acquire NPLs Financial Institutions Investors Minimize Public burden Support Normalization Early recovery of public money Assist Restructuring Government /National Tax Corporate Inject public money

  5. Classification of NPLs Loans currently in default for 3 months or longer whether they are secured or unsecured Unlike RTC,KAMCO had little residential mortgages among ordnary loans Ordinary Loans (27.9%) Loans to companies under court receivership or composition proceedings whether they are secured or unsecured Corporate Loans under Court Restruc- turing (37.6%) Loans to companies under private workout programs,which have been agreed by creditors for restructuring distressed assets Corporate Loans under Workout (34.5%)

  6. Resolution Strategies • Principles & Policies Speedy, Loss Minimizing and Value Upgrading Resolution Efficient Management, Transparent Procedure and Fair Transaction Rehabilitation Strategies Disposition • Suspension of Legal Action • Suspension of Foreclosure • Lend Working Capital • Debt-to-Equity Swap • Payment Guarantee • Purchase Discount notes (CPs) • Portfolio Sales • Securitization (ABS) • Public Sales • Foreclosure Sales • Individual Loan Sales Analysis of NPLs Rescheduling Joint Venture • Discount Outstanding Principal Balance • Reduce Interest Rate • Extend Payment Maturity • Corporate Restructuring Company • SPC(Asset Management Company) • Corporate Restructuring Vehicle

  7. Financial vs Corporate Restructuring • Korean Corporates did not own banks, but owned Non Banking Financial Institutions as subsidiaries. -> NBFIs were one of the reasons of financial crisis in Korea • Public Fund, using Korean taxpayers’ money, could be injected to banks as non-chaebol company. • Korea restructured banks using Public Fund: NPL purchase by KAMCO and and capital injection by KDIC • Then Korean Banks, with enhanced financial capacity, could restructure corporates • Corporate Restructuring was the natural by-product of Financial Restructuring

  8. Financial Restructuring • Extend Payment Maturity By extended debt maturity, present value of debt is reduced • Effective debt write-off • Easier for M&A Sale • Reduced Interest Rate, especially for unsecured debt • Grace Period: Interest Only repaid • Elimination of Cross-Guarantees among Chaebols • Debt to Equity SWAP and Mandatary Convertibles were used in Corporate Reorganization and Workout Debt to Equity SWAP involes risk for creditor: Lose value if debtor is liquidated, • and values and controls are diluted if there is another swap • Capital reduction : More write-off for controlling shareholder than retail shareholder, in case he is responsible for default

  9. Financial Restructuring (continued) • Korean Government supported Debt to Equity SWAP by special Law(Corporate Restructuring Promotion Act) -Debt to Equity SWAP is free from Banks’ stock purchase limits -By Commercial Law, stock new issue price must be higher than par (5,000 Won) • New issue price under par value is up to Court’s approval • In case of Debt to Equity SWAP, shareholders’ approval is enough, without Court approval

  10. Business Restructuring For insolvent debtor company, M&A is difficult as Shareholders’ rights are limited Instead, Business were reorganized, together with debt restructuring New financial intermediaries(CRC,CRV)were introduced to induce External Equity Participation Sale of Assets Sale or Spin-off Business division(Most Deawoo major companies) ->Commercial Code amended (Dec 1998) to introduced sale of business division ->Special Tax Treatment Control Act amended to provide incentives for spinoff

  11. KAMCO’s NPL Vehicles

  12. KAMCO’s Loan Sale to various purchasers • Portfolio Sale -Bulk Sale to Joint Venture SPC(SPC AMC) -Bulk Sale to Joint Venture CRC(Corporate Restructuring Co) -Bulk Sale to 3rd Party SPC Individual Sale - Sale to Joint Venture CRV(Corporate Restructuring Vehicle): (CRV as a workout vehicle needs simple creditor status,hence single debtor rather than a portfolio) - Sale to 3rd Party Investor (Independent CRC etc.)

  13. CRC CRV SPC (AMC) Industry Development Law or Venture Capital License Corporate Restructuring Investment Company Law Oct 2000 Foundation Act Asset Securitization Law Paper Company Independent co Legal Entity Paper Company(Limited Life) KRW7billion KRW 10million KRW500million Paid-in Capital Specialized Manager with paid-in capital KRW 1bil Specialized Manager with Paid-in capital KRW2bil self-managed Manager Role More than 3 sponsors including 2 or more creditors Cash Investor Sponsor Wide Portfolio: all corporates assets for restructuring Single Credit: Wide Portfolio: work-out company debts and All assets pursuant to swapped shares only Securitization Law Target Assets Mandatory Restructuring Business 20% of asset, to be sold within 7 years 100% mandatory, within 5 year life(1 year extendable) Optional Comparison of 3 Vehicles

  14. JV-SPC(AMC) & JV-CRC Process • KAMCO pe-qualified bidder group and then among them selected a JV-Partner • on a particular NPL portfolio by the highest bid price • NPLs are kept under Vehicle’s title and ownership KAMCO:Seller JV-Investor 50% : cash NPLs : 100% 50% : SPV equity + SPV Notes 50% : SPV equity + SPV Notes Vehicle Seller 50% : Investor 50% • Seller and Investor form a JV to warehouse NPL for future restructuring • KAMCO delivers NPL and received Notes issued by The Vehicle • Investor pays cash and receive Vehicle Notes , rather than NPLs direct • CRV, with Workout Creditors’ participation, has more participants than two

  15. Regulatory Support for NPL Vehicles CRC CRV SPC (AMC) Corporate Tax Taxed, but capital gain from capital injection are deducted and some allowance provided Same as SPC 90% dividend deducted from taxable income Transfer Tax Same as SPC(CRCs usually use securitization process) Same as SPC Exempt until 2003 Halved from 2004 until 2006 Exempt until 2006 Acquisition Tax Halved for physical asset purchase Cannot acquire physical asset - Issuing corporate bonds up to 10 times of its equity capital -Can securitize as originator - Issuing corporate bonds up to 10 times of its equity capital - Borrowing up to 200% of its equity capital N.A except Issuing of ABS up to SPV’s asset Purchase Price Funding at Vehicle Level Lending and Guarantee to the work-out company within limit of its asset Not allowed Lending to Debtors Not allowed Applied but SPC share amounts are minimal Stock holding limit by Creditor Bank Applied if bank acquires CRC shares Not applied by CRPA Act

  16. Law Changes Oct 1998 Securitization Law could not introduce Tax Benefit Dec 1999 Tax Law amended -SPC Corporate Tax Benefit (90% dividednd tax free) provided ->Foreign investors preference of Offshore SPC waned -CRC (Feb 1999 Act) was provided Capital Gain exemtion Dec 2000 Tax Law amended CRV (Oct 2000 Act) was provided same tax benefit as SPC Jul 2001 CPRA Act passed Jan 2001 CRC Law amended: minimum restructuring asset requirement raised from 10% to 20%

  17. KAMCO’s Considerations • KAMCO’s Accounting of ‘Vehicle equities’: • adopted ‘Equity Method’, not consolidated • Whether KAMCO is a ‘Holding Co’ under Korean Fair Trade Law • There are many limitations if KAMCO is a‘Holding Co’ • CRC Law exemptions • CRC is exmept from leverage limit of 100% • Also exempt from minimum holding requirementof 50% (30% if listed Co) • CRV Law exemptions • CRV is completely free from Fair Trade Law

  18. JV Foreign Investor’s Considerations If foreign investor acquires CRC or CRV stake, the foreigner shall report to the relevant government authority in advance (Foreign Investment Promotion Act Article 5) Thin Capitalization If foreign investor acquires both CRC/SPC equity and note in package -> Note issue terms and condition should be at arm’ length -> Note should not be more than 600% of equity -> If not, interest payment on note is denied for expense and regarded as dividend (Adjustment of International Taxes Act) Foreigners notification of Purchase of NPLs though SPC/CRC/CRV securities to Bank of Korea

  19. The 1st AMC: Deutsche Bank+Samsung Life Bid Date 12/21/99 Size KRW 484 Billion (USD 403.3 Million: Secured56%,Restructured Corporate44%) The 2nd & 3rd AMC: Morgan Stanley Bid Date 05/9/00 Size KRW 978 Billion (USD 815 Million: Secured 57%,Restructued Corporate43%) The 4th AMC: Colony Capital Bid Date 06/20/01 Size KRW 531 Billion (USD 442.5 Million: Secured 35% Restructued Corporate65%) JV SPC(AMC) (USD 1 = KRW 1,200)

  20. The 1st CRC:Lehman Brothers Bid Date 05/23/00 Size 610 Bil KRW (USD 508.6 Million: Secured 27%,Restructured Corporate73%) The 2nd CRC: Colony Capital Bid Date 09/27/00 Size 657 Bil KRW (USD 547.8 Million: Secured 21%,Restructued Corporate 79%) The 3rd CRC:Morgan Stanley Bid Date 09/27/00 Size 155 Bil KRW (USD 129.1 Million: Secured 30%,Restructured Corporate 70%) The 4th CRC: Colony Capital Bid Date 08/12/03 Size 334 Bil KRW (USD 278.2 Million: Restructured Corporate & Workout 100%) JV CRC (USD 1 = KRW 1,200)

  21. KAMCO JV-Vehicles: From Fire Sale to Restructuring • KAMCO’s 1st Vehicle was 1st SPC(AMC) with Deutsche in Dec 1999 • SPC(AMC), with Restructuring Mandate optional, preferred securedloans, the easier side of NPL market • JV-CRCs, with mandatory Restructuring Mandate, put more than 70% in restructured corporate loans from the start (May 2000) • The 4th CRC with Colony Capital, was 100% restructured corporate loan and workout loans(Aug 2003) • CRV was introduced wholly for Workout loans(Oct 2000)

  22. KAMCO JV CRC: Also acted Stand-Alone basis KAMCO selected JV partner through competitive bidding among eligible candidates : KAMCO was both seller and investorof NPLs But KAMCO’s JV CRC was not Captive : KAMCO JV- CRC bid for other Banks’ NPL auctions KAMCO-LB CRC won Cho Hung 316 bil KRW NPL (2000.12) KAMCO-LB CRC won KAMCO’s individual loan sale (Borneo Furniture under ‘Corporate Reorganization’, 2000.8)

  23. CRV CRV, as a limited life paper co, is an investment vehicle enjoying tax/leverage benefit One Company per one CRV: to avoid complicated multi-debtor,multi- creditors status in CRC Joint Venture between Creditors and 3rd Party investor KAMCO and Banks sell loans/ shares (acquired by swap), and in return receive cash or CRV shares CRV Asset management company should be equipped with expertise and experience in M&A and Workouts.

  24. Why CRV: Workout Decisions were Difficult to Achieve Table: Debt Restructued for Workout (Tril KRW,source:KDI) Workout Decisions, such as Loan rescheduling is subject to 75% of secured creditors’ approval, separate from 75% of all creditors’ approval -As creditors had limited capacity to absorb loss, 42 Debtors had one rescheduling while 43 debtors had twice or more -2nd reschduling usually involved business restructuring`

  25. Why CRV: How to handle ‘Holdout’ Creditor in Workout In Daewoo case, there were holdouts from 480 foreign creditors -> KAMCO agreed to purchase 36.9 bil USD at 43% average price in the “Cash Buy Out(CBO)” program in May 2000. By revised Bankruptcy Law(Apr, 2001), ‘Pre-packaged Bankruptcy System’ was introduced -> If Reorganization package is agreed between creditors before applying for Korean Chapter 11, Court approves quicker hence minimizing negative effects of Chapter 11. -> Prepack was first used in Haitai Confectionery M&A case in 2001 Buy Out pursuant to Corporate Restructuring Promotion Act -> Workout creditors(to fulfil 75%) purchase loans from holdout creditors -> Third Party pricing (accounting firm) -> Formalized ‘workouts’ by providing legal mechanisms for bailing-in holdouts.

  26. Haitai Confectionery Prepackaged Bankruptcy M&A case in 2001 Haitai Confectionary sold to consortium comprised of CVC Asia Pacific Ltd., JP Morgan Partners Asia Ltd. and UBS Capital Asia Pacific Ltd. (33.3% each) for KRW415bn (US$317mn). Consortium secured a 7-year syndicated loan for KRW314bn (US$240mn) from JP Morgan and Chohung Bank (Sep 2001) Principal Activities: Food and beverage conglomerate Date Entered into Distress: 1997 - Declared bankrupt in 1997 June 1998 - Creditors reorganise group into 3 core companies for sale September 1999 - Haitai Confectionary entered into workout program Dec 1999 - Haitai Electronics filed for court receivership process April 2001 - Haitai Confectionary filed for court receivership Oct 2000 - Haitai Stores Corp. placed under court receivership Debt Outstanding: KRW2.3 trillion (US$2bn)

  27. Haitai Confectionery Prepackaged Bankruptcy M&A case in 2001 (Continued) • Key creditors: Chohung Bank* is largest of 31 creditors with KRW500bn exposure • Solutions: • Asset Sale • Haitai Beverage Co. sold to a consortium led by Hikari Printing Group, Lotte Group, Asahi Breweries Ltd., • Mitsui Corp. and Dentsu Inc. for KRW308.5bn (US$262.8mn) (Sep 1999) • Sale of Haitai Tigers (baseball team) to Kia Motors Corp. for an undisclosed amount (May 2001) • Haitai Stores Corp. sold Haitai Department Store for KRW35bn (US$27mn) (Feb 2002) • Debt Haircut • Creditors write-off KRW800bn (US$722mn) of group debt (June 1998) • Debt-for-Equity • Creditors of Haitai Confectionary swap KRW844.2bn (US$761mn) for 99% of equity (Dec 1999) • Creditors of Haitai Stores Corp. convert KRW181bn (US$140mn) for 6.5 million new shares debt-for-preferred equity (Feb 2001)

  28. Why CRV: KAMCO’s involvement in Workout -Daewoos were not many in numbers but 64% in amount of whole Workout Daewoo loans constituted 66.7 tril KRW out of total 104 tril KRW -72% of Daewoo Debt was not loans, but bonds and notes (difficult to workout) -Security Holders could not provide new money on syndicate basis,hence they needed to exit -Also foreign creditors of Daewoo Overseas subsidiaries preferred to exit -KAMCO’s 1999 purchase of Daewoo brought active involvement -KAMCO purchased Daewoo Bonds in KRW, Overseas Loans in USD: 29.5 bil USD face value at 35.86% price (USD 10.58 bil) Non-Daewoo Workout Loans purchased: 2.17 bil USD at 23.04% (0.5 bil USD) -> KAMCO was the Natural Leader of CRV Sponsorship

  29. JV CRV vs Cooperative CRV • M&A under Workout is difficult to achieve • There were 11 M&A cases under Workout • But, for mainly medium sized corporates and mostly sold to strategic investors • JV CRV is equivalent to M&A under Workout • -Cash investor taking over management through CRV AMC without overwhelming majority stake • -Asset Transfer Pricing at Market • When there is no cash investor, Cooperative CRV was used • Daewoo Capital CRV was JV-CRV targetted but with no cash investor, remained as Coop CRV

  30. Cash Investment Investor 2 CRV1 FUND Investment in kind Asset Transfer & Exit KAMCO,Banks Banks Establishment of JV-CRV • Sponsor Creditors evaluate feasibility of CRV: Going Concern Value higher than liquidation value • As Asset, Liability of Debtor Company decided, CRV equity is priced • Sponsor creditors create CRVs: One CRV per each company restructured • 3rd Party investors competitively bid for CRV shares • Creditor Banks have option to participate as shareholder of CRVs by investment in kind at the 3rd party investors’ winning bid price • Creditor Banks transfer their loan assets to CRVs and payment for the assets can either be in the form of cash from 3rd party investor and/or CRV equty

  31. Cash Exit Share Loan Asset sale Share LoanAsset Sale Loan Asset Option to purchaseShare Cash Asset Management & Disposition Service Fee Restructuring KAMCO JV-CRV Structure:Diners Club * JV with Hyundai Capital Creditor (Hana, NACF) KAMCO Holdout Creditor (Nara, SITC) INVESTOR: Hyundai Capital CRV Debtor: Diners Club Card Korea AMC (Investor)

  32. Share+ CRV bond Exit Cash Loan Asset sale Share+ CRV Note LoanAsset Sale Loan Asset Auction failed Asset Management & Disposition Service Fee Restructuring Creditors Cooperative -CRV Structure:Daewoo Capital (The issuance of CRV bonds are not bounded by the limit of corporate bonds issuance) Creditor (Daewoo Sec SITC, Nara) KAMCO Holdout Creditor ( KITC) Potential INVESTOR: n.a CRV Debtor: Daewoo Capital AMC (Investor)

  33. Why CRV was difficult There were Holdout creditors’ cash exit cases: NARA and SITC in Diners Club, KITC in Daewoo Capital CRV Underprovisioned Creditors generally were reluctant to assign loan to CRV and realize loss (Accounting Relief was discussed but not introduced) Senior Creditors were reluctant to become pari-passu with other CRV rightholders, losing seniority of direct creditor Guarantors resisted as they have to fulfil their liabilities when loans are transferred to CRV, which is earlier than usual loan restructuring Creditors preferred Spin-Off as easier alternative(Major Daewoos) It was difficult to designate an Asset Manager(paid) among multiple leading creditors (Co-Op)

  34. The Future of Workout: Corporate Restructuring Promotion Act • Enacted 2001 but in limited lifespan – to expire on 31 December 2005 • Workout Companies to have debt owing of KRW50+ billion (about USD40m) were transferred to CRP Act scheme • Covers wider range of lenders, including branches of foreign banks in Korea • A 3 month moratorium is imposed on CRPA creditors (extendable for one month only) • Lead Bank determines if a restructuring is appropriate, and has responsibility • for developing the restructuring plan • Restructuring plan requires 75% approval in value of CRPA creditors to be passed – dissenting CRPA creditors can “opt out” and seek a cash buy-out • If not approved by 75%, the case goes to formal Prepack DIP financing was given legal support

  35. SK Global CPRA Case: Management remains • After CRP Act, Co-op CRV was not used any more • -> SK Global is recent outstanding CRP Act case • ‘SK CRPA’ debt treatment was agreed between domestic creditors: • 44% is swapped for equity • 33% is applied to CBO(Both Domestic and Foreign creditors) • 23% of debt remains on the balance sheet • Further accepted by 95.8% of Foreign Banks – only 2 Foreign Banks disagreed to 48% return by way of: • Promissory Notes (43%) repayable in full by end 2004 • Bonds (5%) repayable in early 2008 • Warrants to enable participation in equity upside • The alternative was Court Receivership and Worldwide insolvency proceedings - yielding less than 20 cents and could have taken years

  36. Appendix: Securitization vs JV-SPC(AMC) • JV-SPC(AMC) was based on Asset Securitization Law (Oct 1998) • Securitization has developed in two directions in Korea; ‘Public’ and ‘Private’ • ->Public (Genuine) Securitization: Financing by SPC to capital market investors, • relying on assets held by SPC • ->Private (Joint Venture NPL Warehousing) Securitization: SPC equity and notes were pre-placed • to JV-partners, who were the winner of the NPL auction • NPL Auction Winner assigns status to SPC and then subscribes to ‘private placed ABS notes’ • This is equivalent to JV-Partners purchase of NPLs in repackaged form • Why JV-SPC(AMC) used securitization process? • To enjoy easier process of Mortgage Transfer and Exemption of Transfer Tax • * Mortgage Transfer process is complicated in Korea, Japan and Taiwan

  37. Thank You ! Asem Tower, World Trade Center, 159-1 Samsung-dong, Kangnam-ku, Seoul, Korea Http : www.kamco.or.kr Phone: 82-2 2103-6800 Fax: 82-2 2103-6027 e-mail: bchoi@kamco.or.kr All rights reserved, Korea Asset Management Corporation

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