'Capital Erosion' Mineral Resources Corp Raises 200 Billion Won Led by KB Securities

Bypassing Limits on Bond Issuance and Overseas Bond Issuance Postponement
Stagnant Financial Improvement Plans Including Integration with Gwanghae Management Corporation

[Asia Economy Reporter Lim Jeong-su] Korea Resources Corporation, which is in a state of complete capital erosion due to poor overseas resource investments, has raised 200 billion KRW in funds. Since the corporation has already reached its bond issuance limit and the deterioration of its financial situation has delayed overseas bond issuance, it is interpreted that a detour for fund procurement was utilized.

According to the investment banking (IB) industry on the 27th, Korea Resources Corporation recently borrowed 200 billion KRW from a special purpose company (SPC) established under the management of KB Securities and Heungkuk Securities. The loan maturity is about three years, with the repayment date in February 2023. Although the loan is a lump-sum repayment at maturity, early repayment before maturity is also possible.

The SPC created by the underwriters issued short-term asset-backed securities with a one-year maturity, using the principal and interest repaid by Korea Resources Corporation as the underlying assets. The asset-backed securities are reissued annually. The funds raised by issuing asset-backed securities to institutional investors are then lent back to Korea Resources Corporation.

The asset-backed securities are reissued annually for three years. During the refinancing process, if a financial company with a short-term credit rating of A1 or higher does not show investment intent, early repayment of the loan can be requested. If proper investors are not secured, the corporation may face a situation where it must repay the entire loan before maturity.

Korea Resources Corporation is in a situation with significant funding needs such as loan repayments, but raising funds is not easy. The government (Ministry of Economy and Finance) has set a bond issuance limit of 4 trillion KRW, which has already been exhausted, and due to prolonged poor performance, overseas bond issuance is also difficult. Recently, the corporation attempted to issue Australian Kangaroo bonds with a global investment bank as the underwriter, but bond issuance was delayed due to uncertainties surrounding the merger with the Korea Mine Reclamation Corporation and COVID-19.

Korea Resources Corporation has not escaped complete capital erosion, where liabilities exceed total assets, for five consecutive years since 2016. The total equity began to sharply decline from 2015 (1.8317 trillion KRW), turning negative in 2016, resulting in complete capital erosion. Last year, total equity reached -2.1965 trillion KRW, and the scale of capital erosion has continued to increase over the past four years. The financial situation has continuously worsened due to annual losses amounting to several hundred billion KRW.

Despite poor performance, the corporation continued overseas resource development investments, increasing borrowings from 2.37 trillion KRW in the first half of 2015 to 5.22 trillion KRW in the first half of 2019. Although most borrowings rely on corporate bonds and long-term loans from financial institutions, as of the end of last year's first half, about 1 trillion KRW in short-term borrowings were used.

As liquidity risk escalated, the possibility of bankruptcy also emerged. The Ministry of Trade, Industry and Energy, the supervising ministry, proposed a plan to merge with the Korea Mine Reclamation Corporation to improve the financial structure, but related legislation failed to pass the National Assembly due to opposition from the Korea Mine Reclamation Corporation’s labor union and others.

The financial structure improvement plan has not been properly implemented. Korea Resources Corporation decided last year to overcome the liquidity crisis by selling investment assets worth 1.54 trillion KRW. Last year, it attempted to sell a 10% stake in the Panama copper mine (Cobre Panama), but the sale failed due to a decline in raw material prices. Although there are plans to reattempt, it is uncertain whether an appropriate value can be obtained.

An IB industry official said, "Since the government provides guarantees for Korea Resources Corporation’s borrowings, the risk of non-repayment of corporate bonds and other borrowings is quite low," but added, "Due to the increasing scale of insolvency and continuous deterioration of the financial situation, securing liquidity is not smooth."

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