Collapse of Homeplus & More Bankruptcies of PE Owned Companies Globally [A Prelude to Big Short II?]

• We discuss an emerging concern in the global financial markets which is that many high-profile PE owned companies around the world are increasingly experiencing bankruptcies or near bankruptcies.

• The excessive leverage that MBK has tried to use on Homeplus has backfired due to higher interest rates, greater competition from Emart/Coupang, COVID-19, and lower buying power from asset sales.

• Although it may be premature to declare these bankruptcies/near-bankruptcies to be a prelude to the next Big Short 2, they indeed raise so many alarming bells.

In this insight, we discuss an emerging concern in the global financial markets which is that many high-profile private equity (PE) owned companies around the world are increasingly experiencing bankruptcies or near bankruptcies. Although it may be premature to declare these bankruptcies to be a prelude to the next Big Short 2, they indeed raise so many alarming bells. These business failures of PE owned companies are happening on a global basis including in South Korea.

Two key words point to the heart of these PE owned companies bankruptcies which include interest rates and pension funds (too big to fail).

Case Study of Homeplus Collapse

MBK acquired a 100 percent stake in Homeplus from the British retailer Tesco for 7.2 trillion won (US$4.9 billion) in 2015. At that time, the acquisition of Homeplus by MBK was the largest ever LBO transaction in Asia. To acquire Homeplus, MBK used its own 2.2 trillion won in equity and the remaining 5 trillion won was financed with debt which were backed by Homeplus' assets.

• Interest rates - Back in 2015, global interest rates were near rock bottom low. Major Asian PE firms such as MBK capitalized on these low interest rates to make massive bets on acquiring companies such as Homeplus using LBO strategies. Now that interest rates are much higher than they were a decade ago, many global PEs are having more difficulties in rolling over their floating rate debt on their investments.

• Pension Funds (Too Big To Fail) - In 2008, the major global banks such as JP Morgan were too big to fail. This time around, the too big to fail entities involve pension funds such as the NPS (National Pension Fund of South Korea).

  • NPS invested 600 billion won in redeemable convertible preferred shares (RCPS) of Homeplus in 2015.

  • NPS could lose nearly 300 billion won to 600 billion won from its investment in Homeplus. It remains uncertain at this point how much NPS could recoup its original investment in Homeplus.

  • For many years since its original investment, NPS probably recorded some paper gains on its RCPS investment in Homeplus.

  • If Homeplus is not able to survive on its own in the next several weeks and enters into a bankruptcy, it is possible that NPS could lose significant amount of its original investment in Homeplus. This would also mean that after nearly a decade of paper gains, NPS may need to record some sizable losses for its investment in Homeplus.