Heavy Debt Burden... Homeplus Files for Rehabilitation, MBK Halts SSM Sale

Recently, Homeplus, whose credit rating has declined, has entered corporate rehabilitation proceedings due to difficulties in securing working capital. MBK Partners, the private equity fund (PEF) operator and major shareholder of Homeplus, has also halted the planned split sale of Homeplus's corporate supermarket (SSM) division, which had been underway since the second half of last year.

According to the investment banking (IB) industry on the 4th, MBK Partners has suspended the split sale process of Homeplus's SSM business unit, 'Homeplus Express.' Since Homeplus's assets are temporarily frozen upon entering corporate rehabilitation proceedings, it is difficult to proceed with the separate sale for the time being. Although Morgan Stanley was selected as the sales lead in the second half of last year and due diligence was underway, the process was stopped due to concerns over short-term liquidity deterioration. An MBK Partners official explained, "Multiple domestic strategic investors (SIs) showed interest and due diligence was in progress, but the sale process was halted following the commencement of rehabilitation proceedings."

MBK plans to focus on normalizing Homeplus's management for now. On the morning of the same day, the Seoul Rehabilitation Court decided to commence Homeplus's rehabilitation proceedings. Homeplus stated that it applied for rehabilitation proceedings as a preemptive restructuring measure following the downgrade of its credit rating. Although it is not yet insolvent or lacking funds, the company aims to restore financial soundness through rehabilitation proceedings due to potential difficulties in future financing caused by the credit rating downgrade. Earlier, credit rating agencies such as Korea Ratings downgraded Homeplus's commercial paper and short-term bond credit ratings from A3 to A3- on the 28th of last month.

An MBK Partners representative said, "Homeplus's rehabilitation proceedings were an unavoidable decision to proactively alleviate potential short-term funding burdens caused by the credit rating downgrade and to ensure stable operation of Homeplus's business," adding, "Given the current situation, we judged that protecting the interests of Homeplus's employees and business partners is most important, and thus decided to cooperate with Homeplus management's application for rehabilitation proceedings."

Regardless of the rehabilitation application, Homeplus's large marts, Express stores, and online channels are operating normally. Transactions are also proceeding smoothly.

Due to the nature of the distribution industry, Homeplus pays large-scale purchase payments once a month in a lump sum, while sales proceeds come in daily. To cover the timing gap in cash inflows, it uses purchase and operating fund securitization and issues short-term commercial paper as working capital. Amid this, the credit rating downgrade raised concerns about a sharp decline in demand for short-term bond investments.

Homeplus's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the 12 months ending January 31 was 237.4 billion KRW. With the rehabilitation decision, financial claims have been deferred, reducing financial burdens. Since most sales are settled in cash, approximately 100 billion KRW of surplus cash is expected to flow in within 1 to 2 months.

Currently, excluding Homeplus's lease liabilities (store rents), financial liabilities including operating fund borrowings amount to about 2 trillion KRW. A significant portion of these financial liabilities is secured by Homeplus's real estate assets, valued at 4.7 trillion KRW by appraisal agencies. An MBK official stated, "Homeplus's debt ratio has improved by 1506% compared to a year ago, now standing at 462%," and added, "We have been striving for normalization and will continue to do our best."

Meanwhile, Homeplus has recorded operating losses for three consecutive years. Based on fiscal years, operating losses were 133.5 billion KRW in 2021, 260.2 billion KRW in 2022, and 199.4 billion KRW in 2023. Among these, Homeplus Express has continued to grow as a profitable business. In 2023, it recorded sales of 1.2 trillion KRW with an EBITDA margin of 8%.

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