The Seoul Bankruptcy Court announced Tuesday that it had approved the corporate rehabilitation request filed by South Korean supermarket chain Homeplus, initiating prompt proceedings just 11 hours after the filing.

On Tuesday morning, Homeplus announced that it had filed for corporate rehabilitation as a preemptive measure to address potential funding issues following its recent credit rating downgrade.

The court’s decision to approve the proceedings was based on the assessment that a funding shortage could arise around May if the financial structure did not improve, despite the chain not being in default, due to the downgrade of its commercial paper credit rating.

Homeplus will be able to proceed with the rehabilitation process while its normal operations continue without disruption. The deadline for submitting the rehabilitation plan is June 3.

The court also ruled to uphold the company’s current co-CEO system during the preemptive restructuring process, led by CEO Joh Ju-yeon and MBK Partners Vice Chairman Kim Kwang-il. In 2015, private equity fund MBK Partners acquired Homeplus for 7.2 trillion won ($4.9 billion).

Homeplus’s rehabilitation filing came as its improved sales and debt ratio were not adequately reflected in its credit evaluation, the company stated, leading Korea Investors Service to downgrade its credit rating from A3 to A3- on Friday.

The credit agency attributed the rating cut to weakened profitability, high financial burdens and uncertainty surrounding mid- to long-term business competitiveness.

“We applied for rehabilitation proceedings to ease short-term debt repayment, as the lowered credit rating could potentially cause funding issues,” an official from Homeplus said, emphasizing that the move is only a preventive measure.

As of January, Homeplus reported a debt ratio of 462 percent and annual sales of 7.04 trillion won, reflecting a 1,506 percent improvement in its debt ratio and a 2.8 percent increase in sales compared to the previous year.

Although annual revenue had been on a four-year decline, dropping from 7.65 trillion won in 2018 to 6.48 trillion won in 2021, sales figures have trended upward in the past three years, reaching 6.6 trillion won in 2022 and 6.93 trillion won in 2023.

Excluding lease liabilities that account for all rent during the remaining contract period, Homeplus' actual financial debt, including operating funds borrowing, stands at about 2 trillion won. With over 4.7 trillion won in real estate assets, the company expects a smooth restructuring process with financial creditors under the rehabilitation plan.

While bond redemptions will be suspended during the rehabilitation proceedings, general business dealings with partner companies will be settled in full, and employee salaries will continue as usual, the company explained.

Founded in 1997 as part of Samsung C&T's retail division, the nation's second-largest supermarket chain experienced a tumultuous history of ownership changes.

After the Asian financial crisis in 1997, Samsung sold 49 percent of Homeplus to British retailer Tesco in 1999, forming a joint venture to operate the chain under the new partnership.

In 2011, Samsung divested its remaining 51 percent stake, making Tesco the sole owner of the supermarket chain.

However, after Tesco’s accounting scandal in 2014 and its declining business performance, private equity fund MBK Partners, in a consortium with the Canada Pension Plan Investment Board, the Public Sector Pension Investment Board, and Temasek, acquired Homeplus for 7.2 trillion won.

Since taking control, MBK Partners has sold 20 Homeplus stores to repay approximately 4 trillion won in debt and has been in the process of searching for a new buyer for the supermarket division.

According to industry sources, Homeplus has shown signs of liquidity strain, delaying payments to suppliers by one to two months since late last year.

Some critics have raised concerns over MBK’s management approach, arguing that the firm is seeking rehabilitation support for Homeplus without taking sufficient self-restructuring measures.

“Every company that MBK touches seems to fall into difficulty, with its retail businesses ending up debt-ridden and its financial operations coming under scrutiny for poor loan management,” an industry insider said.

He further noted that MBK appears unapologetic for its management track record, focusing solely on short-term profits with little regard for long-term corporate value.

MBK has also been in the spotlight in recent months for its multi-trillion-won attempt to acquire Korea Zinc, the world's largest zinc smelter, in alliance with the zinc producer’s largest shareholder, Young Poong.

By No Kyung-min (minmin@heraldcorp.com