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The World Bank Corporate Restructuring Fund: The Korean Case
24 March 2004
Christopher Vale Chief Investment Officer – Asia Rexiter Capital Management
Rexiter Capital Management
a joint venture between State Street and ABP (largest Dutch Pension Fund) Headquartered in London. Rexiter also have an office in Korea staffed by two senior fund managers and three Korean analysts seconded from its local sub-adviser (Hansset) 3 .Introduction to Rexiter Capital Management Rexiter is a Global Emerging Markets Fund Manager with funds under management of approximately USD1bn founded in 1997 Rexiter is owned 25% by its employees and 75% by State Street Global Alliance LLC.
Government Objectives: Corporate Sector Reform In 1998 crisis led the Korean Government to… Encourage SMEs Dismantle Chaebols Improve corporate governance Improve balance sheets 4 .
POSCO increase effective 21 Aug 98 (on amendment of companies' articles of incorporation). POSCO SK Telecom 10% 8% 1 10% 12% 8% 12% 15% 10% 15% 18% 12% 18% 20% 15% 20% 23% 18% 23% 26% 21% 26% 50% 25% 33% 55% 25% 33% 100% 30% 33% 100% 30% 49% Limits on single foreign investors investing in: Corporations (non-bank) KEPCO. foreign investors wishing to buy a controlling interest in a bank must be a bank or financial institution. However. 1 5 .Foreign Investment Ceilings 1-Jan-92 1-Dec-94 1-Jul-95 1-Apr-96 1-Oct-96 1-May-97 3-Nov-97 11-Dec-97 30-Dec-97 25-May-98 1-Jul-99 Limits on aggregate foreign investment in: Corporations KEPCO. T his measure effectively allowed foreign investors to purchase unlisted stocks and unlisted bonds.Opening up of Korea . Individual or aggregate limits on ownership of these instruments do not apply unless mandated by specific industry laws (eg in the telecoms industry). POSCO 1% 1% 1% SK Telecom Banks 1% 4% 5% 1% 5% 4% 6% 1% 6% 4% 7% 1% 7% 4% 50% 3% 2 33% 4% 50% 3% 33% 4% 100% 3% 33% 4% 100% 3% 33% 100% 3 Sources: Bloomberg. 2 KEPCO increase effective 31 Aug 98. Korea T elecom: ownership limits (aggregate/single) = 33% / 15%. Effective 1 July 1998 foreign investors were permitted to invest in all securities in Korea. 3 Banks: individual ownership limits on banks were removed at the start of 1999. State Street Bank & T rust Notes KEPCO opening effective 23 Nov 92. POSCO opening effective 13 Oct 92 (on amendment of companies' articles of incorporation).
at 20% of market capitalisation.Korea .1 12/95 4.1 6 .Weight In MSCI AC Far East Free ex-Japan Index 25% 20% 15% Malaysia removed from Free indices on 30 Sep 1998 following imposition of capital controls Korea inclusion factor raised to 100% of market capitalisation on 31 Aug 1998 10% Korea added to regional indices on 31 Jan 1992. at the end of August 1998. to 100% MSCI ACFEFJ % Korea 1/92 5. At the end of September 1996.5 11/99 25. the inclusion factor was raised to 50% of market cap. at 20% of total market capitalisation Korea inclusion factor raised to 50% of market capitalisation on 30 Sep 96 5% 0% Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Source: MSCI Korea first entered the MSCI regional indices at the end of January 1992.
Background to the Korean Corporate Restructuring Funds (CRFs) One of the policy initiatives taken by the Korean Government to counter the economic crisis that befell Korea in 1997/1998 The CRFs consisted of four funds totalling USD1.3bn. Rothchild Inc. received USD500m in a debt mandate The funds were provided by 23 Korean Financial Institutions coordinated by the Government owned Korea Development Bank The CRFs were targeted at small and medium sized Korean companies Money received on 1st November 1998 7 . Templeton and Scudder received USD250m each in balanced mandates. State Street.
Investment Guidelines of the Korean CRFs (1) Must invest in newly issued debt or equity thus private equity in nature Should focus on: technology exporters venture companies work-outs (subsequent request by MOF) 8 .
Investment Guidelines for the Korean CRFs (2) Investment prohibited in the following : Five largest business groups (Chaebol) Government owned institutions eg Kepco and Posco Property. Finance and Insurance companies No more than 50% of the funds in 6th – 30th Chaebol 9 .
Portfolio Characteristics of the Korean CRFs 10% maximum in a single company (I.e. $25m maximum investment size) 25% maximum in any 6th – 30th chaebol 25% maximum in any sector Minimum number of investments 25 (ie average maximum investment $10m) Maximum ownership 49% of any company (ie minority positions only) Minimum investment debt or equity 30% Unlisted investments had to be between 5% and 30% 10 .
Cost Analysis for the CRFs Management Fee Performance Fee Must employ local advisory firm Must maintain office in Korea Must invest 50% by April 1999 (within five months) Must invest 80% by July 1999 (ie within nine months) Initial two year contract 11 .
chaired by Korea Development Bank Custodian and Administrator: KDB (and subsequently A Brain) Manager: State Street Sub-Adviser: Hansset Global Advisers 12 .Structure of Arirang CRFs Mutual Funds – in theory had to list within 12 months Reported to a Board of Directors.
Investment Process Introduced to Potential Investee Companies Screen 300+ companies SSgA visit 100+ companies Sign Letter of Intent and Confidentiality Establish financial projections and verify assumptions used See customers of potential investee companies Sign Term Sheet Propose Investment to Investment Committee Negotiate Final Terms and Contract 13 .Arirang Restructuring Fund .
14 . 6 IPO’s 2 major work-outs. 11 KSE Made capital distributions every June totalling KRW 220bn (approx $190mn ) Fund currently worth KRW 173bn (approx $147mn) All listed investments to be sold and distributed to shareholders by Sept 04. 13 Kosdaq. 16 unlisted.Review of Arirang Corporate Restructuring Fund Made 40 investments. 10 Venture.
1999 KOSDAQ 58% 15 .Arirang Characteristics Sectors Cash 14% Instrument Bond with Warrant 5% Cash 14% Convertible Bond 5% Industrial 20% Technology 49% Common Share 67% Consumer 17% Straight Bond 9% Listing KSE 25% Unlisted 17% As at December 3.
Positives Provided much needed capital quickly to many smaller companies when: Banks couldn‟t lend Equity Market was too low for rights issue Policy goals met in terms of economic recovery.Korean CRF’s . Improved balance sheets Improved corporate governance – investments usually incorporated: Veto on debt/equity issuance Veto on Capex Board seats Tag-along rights Monthly reports Improved investor relations (IPOs at higher prices in Arirang invested) Managers had investment discretion 16 . maintaining employment.
Too many other funds – CBO funds. Chaebol influence. collateral). 17 . Balanced of fund size/No of investments not quite right. Korean banks (write-offs. work-out). Venture funds. family and alumni influence.Negatives Fund structure could be improved Mutual funds vs closed funds Distributions Fees Political football – constant criticism by opposition parties hindered objectives. Range of investments too wide (venture. Legal background.Korean CRF’s .
Appropriate fund and fee structure. Clear and appropriate investment guidelines. Reasonably large economy (number and size of companies) Investment discretion for Fund Managers.What is Required To Make CRF’s Work In Other Countries? Funds to be raised internally – Policy vs Performance dilemma. 18 . Liquid stock market for exits. Acceptance of best practice – Due diligence requirements.
Appendix – Investment Examples .
20 .Telson Kosdaq .listed mobile handset manufacturer CDMA licence with Qualcomm Manufacturing alliance with Motorola Sales forecast to rise from KRW77bn in 1998 to over KRW 300bn in 1999 Needed capital to offset debt used to build new factory (opened April 1999) Arirang subscribed US$5m in a November 1998 convertible bond issue for 8% stake.Investment Example . Converted December 1999.
6% equity stake Arirang took up a US$1m rights issue.Motor & Technology Kosdaq listed motor manufacturer „stepping motors‟ used in CD Roms. FDDs and air conditioners possibilities for „vibrating motors‟ used in mobile phones Needed capital to reduce debt and expand Chinese factory Arirang subscribed US$6. 21 .4m at 3 times the share price for a 21.Investment Example .
Investment Example .3m in equity for a 14% stake Listed on Kosdaq in November 1999. 22 .Sewon Mobile Handset manufacturer CDMA and GSM licence agreement with SK Telecom Small MP3 business Needed funds to reduce debts incurred in setting up factory and for working capital Arirang subscribed US$7.
.Chefline Corporation Introduction . A Complicated First Phase Restructuring concluded in July 2000…. 23 . the secured and unsecured creditors. and W7.99% holding. and the convertible bond proceeds were used to redeem 10% of the outstanding secured and unsecured liabilities. all of which had to be agreed by the creditors.this CB is outside the transaction described herein.the Original Investment The Corporate Restructuring Funds (CRFs) were encouraged to execute at least one pure financial restructuring of a troubled company in the course of investing their funds.Work-Out Example .350 shares or a 48.695bn in convertible bonds. In July 2000. Mukoonghwa invested W2bn in a convertible bond to provide additional working capital . this was part of a comprehensive restructuring. The Arirang investment decision was predicated upon a hoped for strong recovery in the company‟s sales and earnings to pre-crisis levels. Chefline had agreed a “work-out” programme with creditors in April 1998 which collapsed shortly thereafter . In July 2001. a capital reduction.6bn in equity for 922. The Arirang equity investment proceeds were used for working capital.Chefline then went into “court-receivership” (“Hwa-eui”). and a consequent ability to service the rescheduled liabilities. certain of whom had their own financial problems. goodwill write-offs and debt rescheduling out to 2015 and 2019. The Arirang investment in Chefline Corporation (Chefline) in July 2000 represented a financial restructuring investment. This investment was the culmination of 18 months highly complex negotiations with 41 bank and non-bank financial institutions. Arirang invested W4. the transaction involved a merger of two companies.
and merged with Seoul Information Co to strengthen mini-printer marketing In 1997 CNI listed on KOSDAQ. (1 of 2) General Background Established in August 1990 as a small receipt mini-printer manufacturer and computer network software company with capital of W100m and 13 employees In 1992 entered the CAT (Credit Authorisation Terminal) business In 1996 established subsidiary Wide Telecom to develop pager products. founded IT Information (Intelligent Building System).CNI.9.Restructuring Example .104 shares . 24 .46%) Also in 1997. CNI merged with IOTel to acquire pager and wireless data communication technology and established Puloon Technology to manufacture bank note sensors CNI met every criterion for investment by a CRF. President held 51. Inc.7bn with 540.000 shares in issue (Soon Lee. paid-in capital increased to W2.
900 10. pagers. a venture company in technology with export potential.528 732 1999e 45.000 22. of 2) Restructuring Example .5% of Arirang’s paid-in capital.000 3. . mini-receipt printers.Communication Network Interface.935 2. wireless data modems and two-way messenger terminals (the data transmission service provider was Airmedia) In 2H-1998.768 5.CNI.000 7. W m Sales EBIT Net Income 1997a 24. 25 . communication software from host computer to PCs Finance/Transaction Automation Division.CNI By 1998.008 3.516 CNI qualified under CRF investment guidelines. (2Inc.247 761 1998e 25. the W25bn investment amount post-rights issue was 7. Inc.040 9.428 15. CATs.320 2002e 120.480 2000e 65. CNI had three main divisions. CNI provided the following income projections in their Investment Memorandum with wireless data accounting for 50% of revenues. IC card terminal Wireless Data Communication Division. Communication Software Division.000 15. The original investment of W15bn was 4.592 2001e 90.5% of Arirang’s paid-in capital.
5% stake.060/sh.938. or a gross return of W1. Disposal of 2. 26 .330 shares at W2.863. 2.Arirang Milestones History of the Arirang Investment in CNI Feb 1999 Mar 1999 416. 2.999. Arirang holding 6.000.992.6% discount to the market price.911.667 shares at W24.320.250.000 shares for a 21.000 for a 38% stake at a 18.878.865.870.865. Percentage holding in CNI is unchanged. Total Arirang holding 8.8/share to realise W14.400/sh. Arirang holding 4.000.008.000 for a 16% stake.250.5% on invested amount Nov 1999 May 2000 Mar 2003 Arirang was the major shareholder in CNI from the date of its initial investment in Feb 1999 until its final exit in March 2003 and made best efforts to exert influence over management.3435876 new to 1 old share at W5.000 par value. Arirang took up its rights subscribing to 2.460. Shares had W500 par value following 10:1 stock split Total holding 6.000 shares for a 48.140 or 7. Recovery totals W25.422 shares sold at an average W6.300.460.955.000. invested amount W10.818.804.023.250.2% stake.CNI .083.147.147.511.955.8/sh raising W11.000 shares in the market at W5.934. Disposal of 4.000/sh.000. Disposal of the “rights shares” in the market. Total recovery is W27. invested amount W4.508.422 shares for a consideration of W10.250.000 shares for a 33.2% stake.000 shares by competitive auction/block trade at W440/sh to raise W1.397.943. Shares had W5. Aug 1999 Rights issue of 0.320.422 shares for an invested amount of W25.680.780.
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