The CRPA – An Effective Aid in Cross-Border Restructurings? The recent case of SK Global (now called “SK Networks”) Edward Cairns – White & Case LLP 12 th November 2003
The CRPA Process What is it? • The CRPA is an “out of court” restructuring process available in Korea pursuant to a legislative framework (i. e. the Corporate Restructuring Promotion Act of 14 August 2001) • The legislation is new – effective from 15 September 2001 • Has a limited lifespan – it is due to expire on 31 December 2005 • Companies to have debt owing of KRW 50+ billion (about USD 40 m) • Covers Korean financial institutions, including branches of foreign banks in Korea • The largest creditor bank is responsible for leading the restructuring • 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 as an alternative
SK GLOBAL A brief corporate history…. . • SK Global was founded in 1953 as Sunkyong Textiles, a producer of woven textiles • In 1980, Yukong Limited (formerly known as Korea Oil Corporation) was acquired – now known as SK Corporation (“SK Corp”) • In 1991, Daehan Telecom Limited was founded and merged with Korea Mobile Telecom in 1997 to become SK Telecom – telecommunications became a key focus • In 1998, the Sunkyong Group was “re-branded” and became the SK Group, South Korea’s 4 th largest chaebol • In 1999, in a reorganisation of the Group, SK Corp became the effective holding Co. • The SK Group was involved in over 2, 000 products from textiles and clothing to petrochemicals, telecommunications and various commodities • SK Global’s main business activities were as a Global Trading Co. and Energy Sales. Heavily dependent on trading with its affiliates • SK Global has now changed its name to SK Networks and will focus on the provision of telecommunications products (primarily fixed line services for SK Telecom)
The Warning Signs November 2002 § SK Global fined for irregular option trades with JP Morgan February 2003 § Commencement of investigation by Seoul District § Prosecutors’ Office Arrest of the Chairman of SK Corp, Chey Tae-won, with respect to suspicious stock deals Late February/Early March § SK Global share price fell 40% Early March § The Chairman of SK Global, Son Kil-seung, is summonsed by 11 March § Accounting irregularities announced totalling KRW 1, 559 prosecutors with respect to their investigation billion (USD 1. 3 billion) 12 March 19 March § Hana Bank calls meeting under Corporate Restructuring § § Promotion Act (“CRPA”) at the request of the FSS to implement a standstill Korean Banks vote to commence CRPA 3 month standstill period commences, effective from 11/3/03
Impact of the Asian Financial Crisis • Reforms were introduced emphasising transparency and focus on core businesses – the chaebol were required to reduce cross-holdings and support for unprofitable affiliates • The SK Group was not as diversified as other chaebol that collapsed such as Daewoo and Hyundai but it did not learn from the mistakes of these groups • The SK Group was to reduce the affiliates from 45 to 10 by Dec 1999 – it retained 41 and by Dec 2002 it had 62 as it expanded and diversified rather than focused on core businesses • The Government failed to monitor the activities of the chaebol as the Korean economy appeared to recover • Many examples of SK Group raising capital and using funds to support, maintain or strengthen control over other affiliates – SK Global was a de facto “waste bin”
The Balance Sheet Position – Published Consolidated 2001 (USDm) 2002 (USDm) Current Assets 1, 995 1, 447 Non Current Assets 3, 419 3, 089 Total Assets 5, 414 4, 536 Current Liabilities 3, 817 3, 559 Non Current Liabilities 1, 049 1, 246 Total Liabilities 4, 866 4, 805 548 (269) Equity (Consolidated) • SK Global (unconsolidated) 2002 balance sheet was amended following due diligence performed after 11 March 2003 (commencement date of CRPA) as follows: USDm Equity before due diligence (133) Net due diligence adjustments (3, 522) Equity after due diligence (3, 655)
The Debt Picture Level of Debt • The extent of financial institution debt as at 11 March 2003 can be shown as follows: Korean Banks and Institutions No. 93 USDm SK Global (parent) Subsidiaries (based outside Korea) Total Foreign Banks No. 48 USDm 4, 429. 1 96. 3 952. 2 803. 3 5, 381. 3 85. 7% 899. 6 14. 3% • Virtually all subsidiary debt was subject to guarantees from the parent • It is significant that the majority of Foreign Bank debt was to offshore subsidiaries and not subject to the CRPA process in Korea • Korean Banks held the balance of debt in the Subsidiaries
Early Stages of the Restructure The Tokyo Meeting Foreign Banks met on 8 April 2003 in Tokyo • SKG requested an informal stand still whilst the restructuring plan was prepared • A Foreign Bank Steering Committee (“FBSC”) was formed, representing 9 banks – Standard Chartered Bank was appointed as the lead bank • Foreign Banks were promised a world class restructuring based on international standards with full transparency and equality of treatment for creditors in similar classes Actions of the FBSC • FBSC protected the SKG Group from hostile actions taken by some banks to preserve the status quo for the benefit of all Foreign Banks • FBSC commenced a dialogue with Hana Bank and its advisors • Ferrier Hodgson was engaged as financial advisor to the FBSC • White & Case was engaged as legal counsel to the FBSC
Early Stages of the Restructure The Samil Report • Samil Accounting Corporation (“Samil”) was engaged by SKG / Hana to prepare the following: Ø A Due Diligence Report and liquidation analysis Ø Document the restructuring plan Ø Prepare an analysis of SKG’s new Business Plan • Foreign Banks were put into a holding pattern pending agreeing to a restructuring plan with Korean Banks • At this stage, the FBSC maintained the position that they required payment of 100% of their debt or a full forensic review to explain the losses • Whilst these reports and analyses satisfied the terms of the mandate set by the domestic creditors, they did not provide the Foreign Banks with adequate transparency
The CRPA Plan Negotiation of the CRPA Plan • Hana Bank focused on negotiating the CRPA Plan for the Korean creditors • Hana Bank had Ø to satisfy the Korean Banks Ø have SK Corp contribute to the plan and Ø provide SK Global with a viable future SK Corp • SK Corp was the effective holding company of SK Global and was owed about KRW 1. 5 trillion (USD 1. 25 bn) with respect to trading between the two entities • But no cross guarantees • SK Corp required to swap a debt for equity – the key issues faced were: Ø SK Corp wanted to keep the swap amount low Ø Hana Bank needed the swap high to improve SK Global’s balance sheet and reduce the haircut for the Korean Banks Ø Pressure from Korean Banks for an acceptable restructuring plan
The CRPA Plan • SK Corp was under pressure from shareholders, particularly Sovereign Asset Management (“SAM”) with a 14. 99% holding • SK Corp also under pressure from trade unions and other interest groups • SAM / foreign investors opposed any contribution by SK Corp to bailout SK Global • Negotiations pushed the entire restructure to the brink of Court Receivership in early June What Was Agreed? • At the 11 th hour SK Corp agreed to a debt for equity swap of KRW 850 billion (SAM continues to oppose) • Korean Banks agreed to a combination of the following: Ø Ø 3 types of debt for equity swaps – ” waterfall” depending on the extent of CBO taken Ø • A Cash Buy Out (“CBO”) at 30% Residual debt to be paid after 31/12/07 subject to available cash The plan was dependent on reaching satisfactory agreement with the Foreign Banks
The CRPA Plan The Effect on SKG’s Balance Sheet (Deficiency)/Surplus KRWb Deficiency per Due Diligence (4, 387) Common stock debt for equity swap – SK Corp 850 Common stock debt for equity swap – CRPA creditors 850 Profit on CBO i. e. after payment of 30% of debt applied 592 Redeemable Preference Shares (cap of KRW 1, 000 bn) 1, 000 Mandatory Convertible Bonds (cap of KRW 1, 065 bn) 1, 065 Net Profit for 2003 71 Adjusted Surplus (i. e. Net Assets)* 41 * Subject to compromise of guaranteed debt (will increase the surplus) • Total CRPA debt is treated as follows: Ø 44% is swapped for equity Ø 33% is applied to the CBO Ø 23% of debt remains on the balance sheet (subject to restrictions on repayment)
Documenting the Offer • After the CRPA Plan was agreed, attention turned to dealing with the Foreign Banks • After several weeks of sometimes difficult negotiations, a deal was struck • Basic term sheet within 12 hours of negotiated deal • 3 weeks then spent negotiating a detailed term sheet - points were very difficult to resolve • Detailed agreements drafted • The timeline required by the CRPA Plan was unrealistic and resulted in: Ø The first draft of the Exchange Agreement and related documents being provided 30 August Ø Drafts still materially incomplete and with term sheet issues outstanding Ø All 48 Foreign Banks being required to sign the documents by mid-September Ø Substantial work was performed in a very short period of time to finalise the documents and present them to the Foreign Banks for signing Ø But signing was achieved as required in mid-September
The Outcome The Foreign Banks achieved…. . • A fully secured return of 48% by way of: Ø Promissory Notes (43%) repayable in full by end 2004 Ø Bonds (5%) repayable in early 2008 • 115% collateral cover listed shares / cash • Warrants to enable participation in equity upside • Acceptance by 95. 8% of Foreign Banks – only 2 Foreign Banks chose not to participate • Closing as planned at end October 2003 • SK Networks has a viable future (dependent on trading with its affiliates) • The alternative was Court Receivership and Worldwide insolvency proceedings - yielding less than 20 cents and could have taken years.
Court Receivership • The prospect of Court Receivership was real a possibility • The Court Receivership was to be conducted as follows: Ø a Pre-Packaged proposal would be presented to the Court incorporating the majority of the terms of the CRPA Plan Ø It would be supervised by the Court and therefore the CBO was not certain (in order to conserve SKG’s cash/assets) Ø It would pay only 9% over 9 years on the shortfall of guarantee claims interest free (subject to Court approval) – making the guarantees worthless
The Verdict? § Was the CRPA an effective aid in achieving the § § restructuring of SK Global? “Yes” – but the dynamics in this case were very singular If this legislation is renewed on expiry with more flexibility built in it could be very useful indeed – but its inherent limitations and rigidity will handicap its future usefulness to Korean companies with large overseas borrowings
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