The CRPA – An Effective Aid in
Cross-Border Restructurings?
The recent case of SK Global
(now called “SK Networks”)
Edward Cairns – White & Case LLP
12th November 2003
The CRPA Process
What is it?
•
The CRPA is an “out of court” restructuring process available in Korea pursuant to a legislative
framework (i.e. the Corporate Restructuring Promotion Act of 14 August 2001)
•
The legislation is new – effective from 15 September 2001
•
Has a limited lifespan – it is due to expire on 31 December 2005
•
Companies to have debt owing of KRW50+ billion (about USD40m)
•
Covers Korean financial institutions, including branches of foreign banks in Korea
•
The largest creditor bank is responsible for leading the restructuring
•
A 3 month moratorium is imposed on CRPA creditors (extendable for one month only)
•
Lead Bank determines if a restructuring is appropriate, and has responsibility for developing the
restructuring plan
•
Restructuring plan requires 75% approval in value of CRPA creditors to be passed – dissenting
CRPA creditors can “opt out” and seek a cash buy-out as an alternative
SK GLOBAL
A brief corporate history…..
•
SK Global was founded in 1953 as Sunkyong Textiles, a producer of woven textiles
•
In 1980, Yukong Limited (formerly known as Korea Oil Corporation) was acquired – now known as SK
Corporation (“SK Corp”)
•
In 1991, Daehan Telecom Limited was founded and merged with Korea Mobile Telecom in 1997 to
become SK Telecom – telecommunications became a key focus
•
In 1998, the Sunkyong Group was “re-branded” and became the SK Group, South Korea’s 4th largest
chaebol
•
In 1999, in a reorganisation of the Group, SK Corp became the effective holding Co.
•
The SK Group was involved in over 2,000 products from textiles and clothing to petrochemicals,
telecommunications and various commodities
•
SK Global’s main business activities were as a Global Trading Co. and Energy Sales. Heavily
dependent on trading with its affiliates
•
SK Global has now changed its name to SK Networks and will focus on the provision of
telecommunications products (primarily fixed line services for SK Telecom)
The Warning Signs
November 2002
 SK Global fined for irregular option trades with JP Morgan
February 2003
 Commencement of investigation by Seoul District
Prosecutors’ Office
 Arrest of the Chairman of SK Corp, Chey Tae-won, with
respect to suspicious stock deals
Late February/Early March
 SK Global share price fell 40%
Early March
 The Chairman of SK Global, Son Kil-seung, is summonsed
11 March
 Accounting irregularities announced totalling KRW1,559
by prosecutors with respect to their investigation
billion (USD1.3 billion)
12 March
19 March
 Hana Bank calls meeting under Corporate Restructuring
Promotion Act (“CRPA”) at the request of the FSS to
implement a standstill
 Korean Banks vote to commence CRPA
 3 month standstill period commences, effective from 11/3/03
Impact of the Asian Financial Crisis
•
Reforms were introduced emphasising transparency and focus on core businesses – the chaebol
were required to reduce cross-holdings and support for unprofitable affiliates
•
The SK Group was not as diversified as other chaebol that collapsed such as Daewoo and
Hyundai but it did not learn from the mistakes of these groups
•
The SK Group was to reduce the affiliates from 45 to 10 by Dec 1999 – it retained 41 and by Dec
2002 it had 62 as it expanded and diversified rather than focused on core businesses
•
The Government failed to monitor the activities of the chaebol as the Korean economy appeared
to recover
•
Many examples of SK Group raising capital and using funds to support, maintain or strengthen
control over other affiliates – SK Global was a de facto “waste bin”
The Balance Sheet
Balance Sheet Position – Published Consolidated
2001 (USDm)
2002 (USDm)
Current Assets
1,995
1,447
Non Current Assets
3,419
3,089
Total Assets
5,414
4,536
Current Liabilities
3,817
3,559
Non Current Liabilities
1,049
1,246
Total Liabilities
4,866
4,805
548
(269)
Equity (Consolidated)
•
SK Global (unconsolidated) 2002 balance sheet was amended following due diligence performed
after 11 March 2003 (commencement date of CRPA) as follows:
USDm
Equity before due diligence
(133)
Net due diligence adjustments
(3,522)
Equity after due diligence
(3,655)
The Debt Picture
Level of Debt
•
The extent of financial institution debt as at 11 March 2003 can be shown as follows:
Korean Banks and
Institutions
No. 93
USDm
SK Global (parent)
Subsidiaries (based
outside Korea)
Total
Foreign Banks
No.48
USDm
4,429.1
96.3
952.2
803.3
5,381.3
85.7%
899.6
14.3%
•
Virtually all subsidiary debt was subject to guarantees from the parent
•
It is significant that the majority of Foreign Bank debt was to offshore subsidiaries and not
subject to the CRPA process in Korea
•
Korean Banks held the balance of debt in the Subsidiaries
Early Stages of the Restructure
The Tokyo Meeting
Foreign Banks met on 8 April 2003 in Tokyo
•
SKG requested an informal stand still whilst the restructuring plan was prepared
•
A Foreign Bank Steering Committee (“FBSC”) was formed, representing 9 banks –
Standard Chartered Bank was appointed as the lead bank
•
Foreign Banks were promised a world class restructuring based on international standards
with full transparency and equality of treatment for creditors in similar classes
Actions of the FBSC
•
FBSC protected the SKG Group from hostile actions taken by some banks to preserve the
status quo for the benefit of all Foreign Banks
•
FBSC commenced a dialogue with Hana Bank and its advisors
•
Ferrier Hodgson was engaged as financial advisor to the FBSC
•
White & Case was engaged as legal counsel to the FBSC
Early Stages of the Restructure
The Samil Report
•
Samil Accounting Corporation (“Samil”) was engaged by SKG / Hana to prepare the
following:

A Due Diligence Report and liquidation analysis

Document the restructuring plan

Prepare an analysis of SKG’s new Business Plan
•
Foreign Banks were put into a holding pattern pending agreeing to a restructuring plan with
Korean Banks
•
At this stage, the FBSC maintained the position that they required payment of 100% of their
debt or a full forensic review to explain the losses
•
Whilst these reports and analyses satisfied the terms of the mandate set by the domestic
creditors, they did not provide the Foreign Banks with adequate transparency
The CRPA Plan
Negotiation of the CRPA Plan
•
Hana Bank focused on negotiating the CRPA Plan for the Korean creditors
•
Hana Bank had
 to satisfy the Korean Banks
 have SK Corp contribute to the plan and
 provide SK Global with a viable future
SK Corp
•
SK Corp was the effective holding company of SK Global and was owed about KRW1.5 trillion
(USD1.25 bn) with respect to trading between the two entities
•
But no cross guarantees
•
SK Corp required to swap a debt for equity – the key issues faced were:

SK Corp wanted to keep the swap amount low

Hana Bank needed the swap high to improve SK Global’s balance sheet and reduce the
haircut for the Korean Banks

Pressure from Korean Banks for an acceptable restructuring plan
The CRPA Plan
•
SK Corp was under pressure from shareholders, particularly Sovereign Asset Management
(“SAM”) with a 14.99% holding
•
SK Corp also under pressure from trade unions and other interest groups
•
SAM / foreign investors opposed any contribution by SK Corp to bailout SK Global
•
Negotiations pushed the entire restructure to the brink of Court Receivership in early June
What Was Agreed?
•
At the 11th hour SK Corp agreed to a debt for equity swap of KRW850 billion (SAM continues to
oppose)
•
Korean Banks agreed to a combination of the following:
•

A Cash Buy Out (“CBO”) at 30%

3 types of debt for equity swaps – ” waterfall” depending on the extent of CBO taken

Residual debt to be paid after 31/12/07 subject to available cash
The plan was dependent on reaching satisfactory agreement with the Foreign Banks
The CRPA Plan
The Effect on SKG’s Balance Sheet
(Deficiency)/Surplus KRWb
Deficiency per Due Diligence
(4,387)
Common stock debt for equity swap – SK Corp
850
Common stock debt for equity swap – CRPA creditors
850
Profit on CBO i.e. after payment of 30% of debt applied
592
Redeemable Preference Shares (cap of KRW1,000bn)
1,000
Mandatory Convertible Bonds (cap of KRW1,065bn)
1,065
Net Profit for 2003
71
Adjusted Surplus (i.e. Net Assets)*
41
* Subject to compromise of guaranteed debt (will increase the surplus)
•
Total CRPA debt is treated as follows:
 44% is swapped for equity
 33% is applied to the CBO
 23% of debt remains on the balance sheet (subject to restrictions on repayment)
Documenting the Offer
•
After the CRPA Plan was agreed, attention turned to dealing with the Foreign Banks
•
After several weeks of sometimes difficult negotiations, a deal was struck
•
Basic term sheet within 12 hours of negotiated deal
•
3 weeks then spent negotiating a detailed term sheet - points were very difficult to resolve
•
Detailed agreements drafted
•
The timeline required by the CRPA Plan was unrealistic and resulted in:
 The first draft of the Exchange Agreement and related documents being provided 30 August
 Drafts still materially incomplete and with term sheet issues outstanding
 All 48 Foreign Banks being required to sign the documents by mid-September
 Substantial work was performed in a very short period of time to finalise the documents and
present them to the Foreign Banks for signing
 But signing was achieved as required in mid-September
The Outcome
The Foreign Banks achieved…..
•
A fully secured return of 48% by way of:
 Promissory Notes (43%) repayable in full by end 2004
 Bonds (5%) repayable in early 2008
•
115% collateral cover over listed shares / cash
•
Warrants to enable participation in equity upside
•
Acceptance by 95.8% of Foreign Banks – only 2 Foreign Banks chose not to participate
•
Closing as planned at end October 2003
•
SK Networks has a viable future (dependent on trading with its affiliates)
• The alternative was Court Receivership and Worldwide
insolvency proceedings - yielding less than 20 cents and
could have taken years.
Court Receivership
•
The prospect of Court Receivership was real a possibility
•
The Court Receivership was to be conducted as follows:
 a Pre-Packaged proposal would be presented to the Court incorporating the
majority of the terms of the CRPA Plan
 It would be supervised by the Court and therefore the CBO was not certain (in
order to conserve SKG’s cash/assets)
 It would pay only 9% over 9 years on the shortfall of guarantee claims interest
free (subject to Court approval) – making the guarantees worthless
The Verdict?
 Was the CRPA an effective aid in achieving the


restructuring of SK Global?
“Yes” – but the dynamics in this case were very
singular
If this legislation is renewed on expiry with more
flexibility built in it could be very useful indeed – but
its inherent limitations and rigidity will handicap its
future usefulness to Korean companies with large
overseas borrowings