[Business & Issues] Why LF's Second Largest Shareholder Keeps Buying Stocks Despite Debt Ratio Over 400%

[Image source=Yonhap News]

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Koryo D&L, the second-largest shareholder and affiliate of LF, has recently resumed purchasing LF shares. Since its establishment in 2022, Koryo D&L has continuously increased its stake in LF despite carrying a debt ratio exceeding 400%. The background behind Koryo D&L's ongoing acquisition of LF shares, even amid precarious financial health, is analyzed to be linked to Chairman Koo Bon-geol's efforts to strengthen his control over LF's management rights and the family succession issues.

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According to the Financial Supervisory Service's electronic disclosure system on the 3rd, Koryo D&L purchased an additional 50,331 LF shares through on-market transactions from the 18th to the 29th of last month. With this purchase, Koryo D&L's stake in LF increased to 11.30%. The shareholders holding more than 10% of LF shares are only Chairman Koo (19.11%), the largest shareholder, and Koryo D&L.

Koryo D&L is a landscaping company spun off from LF Networks on July 1, 2022. From its inception, LF Networks transferred its existing 6.18% stake in LF to Koryo D&L, which has since increased its shareholding through continuous purchases. Last year, it acquired approximately 5% of shares, totaling 1,266,677 shares, through on-market purchases, and its stake exceeded 10% from September 20.

Koryo D&L's share purchases have significantly strengthened Chairman Koo's control over management. Until early last year, the combined shares held by Chairman Koo and his related parties amounted to 48.49%, falling short of a majority, but by the end of last month, this exceeded the majority at 53.90%.

As of the end of 2023, the status of short-term borrowings of Goryeo D&L
[Image source=Goryeo D&L audit report]

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Koryo D&L, which purchased a large volume of LF shares on the market in a short period, has incurred massive debt. According to Koryo D&L's 2023 audit report disclosed on the 5th of last month, its total liabilities amounted to 48.77508 billion KRW, and total equity was 11.08055 billion KRW, resulting in a simple debt ratio calculation of 440.2%. Generally, a debt ratio below 200% is considered healthy for corporate financial soundness, while a ratio above 400% is regarded as indicative of a potentially distressed company.

Most of this debt consists of short-term borrowings maturing within one year. As of the end of last year, Koryo D&L's short-term borrowings totaled 40.6 billion KRW, comprising 25.3 billion KRW borrowed from Korea Securities Finance and 15.3 billion KRW borrowed from Chairman Koo. Considering that the book value of LF shares held by Koryo D&L was recorded at 43.2 billion KRW, it is evident that the majority of the debt, including short-term borrowings, was used for share acquisitions.

The likelihood of Koryo D&L repaying this debt independently is very low. Last year, Koryo D&L's sales amounted to 48.6 billion KRW, operating profit was 700 million KRW, and net profit was 240 million KRW. Although these figures improved compared to a net loss of 300 million KRW in 2022, resolving short-term borrowings in the 40 billion KRW range independently remains extremely challenging.

Regarding Koryo D&L's share purchases, an LF official stated, "We understand that the process was conducted through lawful procedures, and there is no official position to disclose beyond the publicly announced information."

Industry insiders believe that despite concerns over financial distress, Koryo D&L's continued borrowing to acquire LF shares is largely driven by the owner's desire to strengthen management control and succession issues. As Koryo D&L increases its stake in LF, the shareholding of Koryo D&L's shareholders also rises accordingly.

Manager Koo holds 91.58% of Koryo D&L's shares, while the remaining 8.42% is owned by Chairman Koo's eldest daughter, Koo Min-jung. Although Manager Koo directly owns only 1.18% of LF shares, when combined with the shares indirectly owned through Koryo D&L, his total stake amounts to 12.48%. Considering that Koryo D&L's LF stake exceeded 10% around the time Manager Koo joined LF's New Business Team in September last year, marking the start of his management training, Koryo D&L's continuous share purchases are closely related to the owner's management succession.

Consequently, there are expectations that Koryo D&L will continue to acquire LF shares regardless of its financial condition. Even if additional borrowing is difficult under the current financial status, continuous share purchases are possible through dividends generated from the LF shares it holds. In fact, Koryo D&L spent 748.51 million KRW last month to secure additional LF shares and stated that the source of acquisition funds was income from dividends. Since LF's 2023 year-end dividend amounted to approximately 19.9 billion KRW, it is estimated that Koryo D&L received about 2.2 billion KRW in dividends considering its stake in LF.

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