Hyosung·Aju Capital Sale Faces 'Corona Dark Cloud'

Hyosung's Preliminary Bidding Plan This Month
Funding Market Expected to Shrink Due to Prolonged COVID-19
Ajou Capital a Leading Acquisition Candidate
Woori Financial Likely to Refrain from M&A

[Asia Economy Reporter Jo Gang-wook] Following insurance companies earlier this year, capital companies such as Hyosung and Aju are coming onto the market, drawing attention from the financial industry. However, concerns are growing that the prolonged COVID-19 pandemic could negatively impact the fundraising market, dampening the prospects of successful deals.

According to financial circles and related industries on the 11th, Hyosung Group recently formed a new sales advisory team led by BDA Partners and is accelerating the sale of Hyosung Capital. The group plans to hold a preliminary bidding within this month. It is known that the final buyer will be selected by October, with the transaction expected to be completed by December.

Hyosung Group, which transitioned to a holding company structure in December 2018, must sell its 97.5% stake in Hyosung Capital within this year. Under the Fair Trade Act, holding companies cannot have financial firms as affiliates, and a two-year grace period is given upon conversion to a holding company. Until now, Hyosung Group had been working with Daiwa Securities and Credit Suisse (CS) as lead managers for the sale, but the process was halted due to disagreements over the sale price with prospective buyers, including foreign private equity funds (PEFs). Some say Hyosung expects about 500 billion KRW, roughly 1.3 times the price-to-book ratio (PBR), while buyers are hoping for around 300 billion KRW. Since a PBR of 1 corresponds to about 400 billion KRW, narrowing this price gap is considered the biggest challenge for a successful sale.

The problem is the unexpected negative factor of COVID-19. Since the outbreak, investors wary of loan asset defaults have shied away from specialized finance company bonds (여전채), causing capital companies that raise funds through these bonds to face liquidity crises. Additionally, the impact of COVID-19 on self-employed businesses has led to a sharp rise in delinquency rates for capital companies, lowering their credit ratings and raising concerns that the spread on specialized finance company bonds (the difference between government bonds and interest rates) will widen further. In this situation, delays in the sale process mean there is absolutely insufficient time for negotiations to raise the sale price. As a result, doubts are emerging not only about the sale price but also about whether the deal will attract sufficient interest.

In the case of Aju Capital, although the situation differs from Hyosung Capital, there is speculation that its most likely acquirer, Woori Financial Group, may refrain from mergers and acquisitions (M&A) for the time being. This is also due to COVID-19. Industry insiders expect that Woori Financial's Basel III (BIS) capital adequacy ratio calculation method will switch to the 'Internal Ratings-Based Approach' during the first half of this year. If applied, Woori Financial's current BIS ratio of around 11% could increase by up to 2 percentage points, easing financial soundness and potentially enabling more aggressive M&A activities in the second half of the year.

However, as the government sets additional financial support measures in response to COVID-19, the strategy to diversify earnings through non-bank sector M&A, including Aju Capital, is likely to be postponed for the time being. Although first-quarter results were solid, concerns that net interest margin declines will accelerate from the second half are causing reluctance to invest capital in external growth. Woori Financial holds a right of first refusal after WelltoSee Investment, a PEF operator and major shareholder of Aju Capital, invested 100 billion KRW to acquire 74.04% of Aju Capital's shares in 2017. Aju Capital's net profit last year was 101.6 billion KRW, up 11.6% year-on-year, and total assets increased 20.5% to 7.4731 trillion KRW.

A financial industry official said, "Card companies and capital companies raise funds by issuing specialized finance company bonds, but the capital market has frozen due to the COVID-19 crisis, severely impacting the specialized finance bond market," adding, "The biggest issue will be narrowing the price gap between sellers and buyers."

This content was produced with the assistance of AI translation services.