[Funding] Homeplus Secures 400 Billion Won by Transferring Retail Store 'Lease Deposit'

[Asia Economy Reporter Lim Jeong-su] Homeplus raised 400 billion KRW in funds by transferring lease deposit refund claims. Due to the continued decline in credit ratings, it has become difficult to raise large-scale funds through corporate bond issuance, and concerns over early repayment of securitized borrowings amounting to around 300 billion KRW have also increased. With difficulties accelerating asset sales due to conflicts with labor unions and worsening performance caused by COVID-19, Homeplus's liquidity response capability is increasingly being evaluated as deteriorating.

According to the investment banking (IB) industry on the 18th, Homeplus recently secured 400 billion KRW in cash liquidity under the management of Kiwoom Securities. They decided to transfer the right to receive lease deposits to the securitization special purpose company Equalizer Retail Securitization No.1 (Equalizer No.1) on an accounting basis and receive a kind of sale payment in return. Equalizer No.1 obtained a two-year asset-backed loan (ABL) from lenders secured by the right to receive deposits (future cash flows). The loan maturity can be extended by one additional year. The loan received through the ABL is then paid to Homeplus as consideration for the transfer of the lease deposit refund claims.

The lease deposit refund claim is the right Homeplus holds to receive back the deposit paid when leasing land and buildings upon lease expiration. It is a deposit paid to the owners of retail store land and buildings through sales and leaseback transactions and is refunded when the lease period ends. Homeplus currently classifies the lease deposits as fixed assets on its financial statements. Through this sale of the lease deposit refund claims, fixed assets worth up to 400 billion KRW will sequentially disappear, and cash of the same amount will increase. Since the claims were sold to a newly established company for securitization, this method allows large-scale fund raising without increasing borrowings. Using this cash to repay borrowings can improve the financial structure.

This liquidity arrangement is interpreted as a response to the worsening management and financial conditions of Homeplus. Due to years of continuous credit rating declines, it has become difficult to raise operating funds through corporate bond issuance, and with deteriorating performance caused by COVID-19, concerns about further credit rating downgrades have recently emerged.

If the credit rating falls further, Homeplus will face the risk of early repayment of securitized borrowings amounting to approximately 330 billion KRW. When funds were raised through past securitizations, a condition was set that if the long-term credit rating falls below BBB+ or the short-term credit rating falls below A3+, creditors can demand early repayment. Homeplus’s current long-term and short-term credit ratings are A- and A2-, respectively, so if they drop one notch further, the trigger will be activated.

Although the financial structure showed some improvement through store sales, signs of deterioration are reappearing. Due to the introduction of new lease accounting standards, operating leases exceeding 4.5 trillion KRW and redeemable convertible preferred shares (RCPS) issued during the acquisition by MBK Partners were all converted into borrowings, causing net borrowings, which were below 400 billion KRW, to increase to as much as 7.12 trillion KRW at one point. By selling stores such as Ansan branch, Dunsan branch in Daejeon, and Daegu branch, net borrowings decreased to 5.3 trillion KRW by the end of February this year. However, with recent cash flow deterioration due to COVID-19, working capital needs are increasing. The debt ratio still exceeds 700%, and the borrowing dependency remains above 50%, indicating a considerably high level.

An IB industry official commented, "After MBK Partners failed to improve Homeplus’s finances through a REIT listing, they shifted direction to separate store sales, but due to conflicts with labor unions, it is difficult to accelerate store sales. With intensified competition in the retail industry and offline store performance deterioration caused by COVID-19, the ability to respond to borrowings is gradually weakening," he evaluated.

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