CONTENTS
- 1. Corporate Debt | Homeplus, Management Normalization Remains Uncertain
- - Corporate Debt Structure
- 2. Corporate Debt | Procedures Chosen When It Worsens
- - Criteria for Reviewing the Rehabilitation Plan
- 3. Corporate Debt | Debt-to-Equity Conversion and Installment Repayment
- - What a Company Must Review
- - The Importance of Advance Management
- - Comprehensive Legal Advisory for Responding to a Corporate Crisis
1. Corporate Debt | Homeplus, Management Normalization Remains Uncertain
When corporate debt accumulates excessively, a company's management crisis can become a reality in an instant.
Recently, the large retail company Homeplus secured additional time for legal review when the period for approving its rehabilitation plan was extended by two months during the course of its corporate rehabilitation proceedings.
As its majority shareholder, MBK Partners, injected approximately 100 billion won in emergency debtor-in-possession (DIP) operating funds, the court deferred its final decision on whether the rehabilitation proceedings would continue.
This decision, however, appears to be closer to securing time to resolve the structural problems of the corporate debt than to signaling a normalization of the company.
This is because a combination of factors, including the worsening conditions of the large discount store sector, accumulated losses, and restructuring, make it difficult for the company to recover its competitiveness.
Homeplus was once a company that formed a two-way rivalry with E-mart in the domestic large discount store market, but its financial structure deteriorated sharply as the large-scale borrowing structure created during its acquisition, the continuing rent burden, and changes in the retail environment overlapped.
In particular, as its debt-to-equity ratio exceeded 500 percent and the burden of corporate debt intensified, the company ultimately filed for corporate rehabilitation proceedings with the court.
Corporate Debt Structure
Corporate debt refers to all monetary obligations that arise in the course of a company's business operations, including financial debt, commercial-transaction debt, rent obligations, and tax obligations.
Companies use external funds in the course of their growth, and when the corporate debt arising in this process becomes excessive, it has a direct effect on the company's financial stability and sustainability.
Representative types of corporate debt are as follows.
- Loans from financial institutions and corporate bonds
- Commercial-transaction debt, such as payments owed to business partners
- Rent and lease contract obligations
- Taxes and public charges
- Personnel-cost obligations, such as employee wages and severance pay
The problem is that, once such debt exceeds a certain level, it can pressure the company's cash flow and lead to a management crisis.
Homeplus, too, came to bear enormous rent and financing costs each year because of the large-scale borrowing incurred during its acquisition and a sale-and-leaseback structure for its stores, and this ultimately led to an expansion of its corporate debt burden.
2. Corporate Debt | Procedures Chosen When It Worsens
When corporate debt reaches a serious level, a company comes to consider corporate rehabilitation or corporate bankruptcy.
In practice, rehabilitation proceedings are often chosen when a company's going-concern value is higher than its liquidation value.
Corporate rehabilitation proceedings are a procedure that normalizes a company by restructuring its debt while continuing to operate the debtor's business.
The most central document in this process is the rehabilitation plan, and the rehabilitation plan includes the following matters.
- The method of repayment to creditors
- A plan for debt reduction or debt-to-equity conversion
- A plan for asset sales and restructuring
- A plan for attracting new investment
- A plan for reorganizing the business structure
The rehabilitation plan takes effect only after it is resolved at the meeting of interested parties and approved by the court.
Criteria for Reviewing the Rehabilitation Plan
When the court reviews a rehabilitation plan, it makes its determination based on the following four principles.
1. The principle of fairness and equity
When the rights of creditors and shareholders are altered, reasonable distinctions must be made according to priority.
2. The principle of equality
Creditors of the same nature must receive substantially equal treatment.
3. Feasibility
Whether the rehabilitation plan can actually be carried out is an important criterion for the determination.
4. The principle of guaranteeing liquidation value
Following the rehabilitation plan must be more advantageous to the interested parties than liquidating the company would be.
In the Homeplus case as well, a situation has emerged in which the liquidation value is assessed as higher than the going-concern value, and debate over the possibility of rehabilitation has continued.
3. Corporate Debt | Debt-to-Equity Conversion and Installment Repayment
The debt-adjustment method most frequently used in corporate rehabilitation practice is debt-to-equity conversion.
Debt-to-equity conversion is a method in which a creditor converts the claim it holds into shares of the company, a structure that allows the company to reduce its debt without any cash outflow and allows the creditor to expect an investment return if the company's value rises in the future.
In addition, rehabilitation proceedings make combined use of various methods, such as partial forgiveness of corporate debt, long-term installment repayment, asset sales, and the attraction of new investment.
What a Company Must Review
The Homeplus case shows that a failure to manage the corporate debt structure can lead to a corporate crisis.
Key Factors a Company Must Review
In particular, a leveraged-buyout structure that arises in the course of a merger and acquisition can undermine a company's financial stability over the long term, so it requires more careful review.
The Importance of Advance Management
A corporate crisis, in most cases, does not arise suddenly but often appears as the deterioration of the financial structure accumulates.
A failure to manage corporate debt can ultimately lead to the following situations.
- Disputes with creditors
- Wage arrears and nonpayment of amounts owed to business partners
- Corporate rehabilitation or bankruptcy
- Issues of management liability
Therefore, it is important for a company to review its debt structure and prepare a legal response strategy before its financial structure deteriorates.
In particular, when the scale of debt grows or the creditor structure becomes complex, a company may need to consider various legal options, such as corporate rehabilitation, debt adjustment, and restructuring.
Corporate Financial Risk Management Strategy
| Management Area | Main Management Methods | Points for Companies to Note |
|---|---|---|
| Borrowing structure management | Reviewing the scale and maturity structure of borrowing, such as loans from financial institutions and corporate bonds | A liquidity crisis may arise when the proportion of short-term borrowing increases |
| Cash flow management | Analyzing debt repayment capacity relative to operating cash flow | Be cautious of a structure in which financing costs exceed operating profit |
| Collateral and guarantee structure management | Reviewing the status of asset collateral provided and the priority of security interests | Excessive provision of collateral weakens bargaining power against creditors |
| Fixed-cost structure management | Analyzing the proportion of fixed costs, such as rent, lease payments, and financing costs | The financial burden may increase sharply when sales decline |
| Creditor structure management | Identifying the composition of creditors, such as financial creditors and commercial creditors | The larger the number of creditors, the greater the difficulty of debt-adjustment negotiations |
| Restructuring response strategy | Reviewing structural improvements, such as asset sales, attracting investment, and debt adjustment | A response strategy should be established at the early stage of a crisis |
Comprehensive Legal Advisory for Responding to a Corporate Crisis
When corporate debt problems intensify, various legal risks arise at the same time, including creditor disputes, issues over amounts owed to business partners, wage arrears, and management liability.
In particular, in a situation where a company must determine whether to pursue corporate rehabilitation, a strategic response is needed that comprehensively reviews not only the financial structure but also the creditor structure, security interest relationships, asset value, and business sustainability.
The attorneys of Daeryun Law Firm LLP who handle corporate matters and insolvency matters closely analyze a company's corporate debt structure and propose a response direction suited to the company's situation, including the feasibility of debt adjustment, whether to proceed with rehabilitation, and creditor negotiation strategy.
Where corporate rehabilitation proceedings are needed, the firm provides legal advice and practical support throughout the entire process, from the filing of the rehabilitation proceedings to the preparation of the rehabilitation plan, consultation with creditors, response at the meeting of interested parties, and the court approval procedure.
In addition to corporate rehabilitation, the firm also conducts legal review of various measures to improve a company's financial structure, such as voluntary debt-adjustment negotiations with creditors, the establishment of asset-sale and restructuring strategies, the design of structures for attracting new investment, and the review of M&A-based restructuring.
Not only in situations where a debt crisis has already arisen but also at the stage where deterioration of the financial structure is anticipated, it is important to prepare a response strategy that reduces the likelihood of proceeding to corporate rehabilitation or bankruptcy through proactive legal advice.
Daeryun provides tailored legal advice that considers both a company's financial situation and its industry structure, helping to prevent corporate debt risks and to support the company's sustainable management.
If you need assistance, you are welcome to make a 🔗legal consultation reservation regarding corporate rehabilitation and bankruptcy.
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