Properties Listed for Hyosung and Ajou Capital... 'COVID-19' as a Variable (Comprehensive)

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 Kangwook Cho] At the beginning of this year, following insurance companies, capital companies such as Hyosung and Aju have come onto the market, attracting attention from the financial industry. However, concerns are growing that the prolonged COVID-19 pandemic may negatively impact the fundraising market, thereby reducing the chances of a successful sale.

According to financial and related industry sources 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 conduct 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 on the sale with Daiwa Securities and Credit Suisse (CS) as lead managers, but the process was halted due to disagreements over the sale price with prospective buyers such as 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 sale price at a PBR of 1 would be 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 increased, leading to a sharp rise in capital companies’ delinquency rates, 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, there is even doubt about whether the sale will attract interest, regardless of the final price.

In the case of Aju Capital, although the situation differs from Hyosung Capital, it is suggested that Woori Financial Group, the most likely buyer, 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 activity 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 discourage capital deployment toward external growth. Woori Financial holds a right of first refusal after WelltoSee Investment, the 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 by 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 (여전채), but the capital market has frozen due to the COVID-19 crisis, severely impacting the specialized finance bond market as well," 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.