VideoFor foreign creditors struggling with Asia's tortuous debt restructurings, events last month at Korean liquor maker Jinro could well offer something to cheer about. On May 14, the Seoul District Court ruled in favour of a petition filed by US investment bank Goldman Sachs and appointed a receiver to manage the affairs of Jinro. It marks the first time that a foreign creditor has ever forced a Korean company into receivership. The implications of the decision could be far-reaching.
Dong Su Lee, an economist at Tong Yang Securities in Seoul, believes the Jinro court case sets an important precedent. "Corporate governance in Korea has been weak up until now," he concedes, "but this case shows the government is taking a tougher stance."
In the past, say other commentators, debt restructurings in Korea have all too often been negotiated on a consensual basis, with creditor and company adopting a non-confrontational position, and international parties being shut out of negotiations. Not any more. According to Jung Tae Chae, country head in Korea for Standard & Poor's, the credit rating agency, the Jinro case is an example of "the Korean market moving in the right direction." It sends an important message, he stresses, "that foreign investors will be treated equally."
The Perils of Excess
Ever since its formation in 1924, Jinro has been famous for selling one of Korea's leading brands of soju, a drink distilled from rice, tapioca or sweet potatoes. And the company proved a dab hand at it, building a share of Korea's soju market in excess of 50 percent nationwide.
But then came the 1990s. Borrowing heavily in US dollars, Jinro decided to diversify into areas such as construction, TV broadcasting and running department stores. The strategy was a disaster. Not only did the new businesses fail, but when the Korean won crashed in 1997, Jinro found itself crushed beneath a debt pile that now totals some US$1.5 billion. With net sales of some US$500 million and operating profit of approximately US$80 million in fiscal 2002, Jinro could barely meet its interest burden, let alone repay principal.
To help the company get back on its feet, Jinro was given a five-year "composition period" (similar to US Chapter 11 bankruptcy protection) and it was during this time, in 1998, that Goldman Sachs first became involved.
Along with accomplices Morgan Stanley and Deutsche Bank, Goldman's distressed debt team purchased Jinro bonds with a face value of 277 billion won (US$230 million), paying around 40 cents on the dollar for the debt. The bonds were bought from KAMCO, the Korean government's fund charged with restructuring corporate Korea's debts after the Asian financial crisis, and Goldman subsequently increased its position to around 20 percent of Jinro's outstanding debt.
On March 31 this year, however, Jinro's composition period came to an end and so did its luck. While Jinro had continued to pay interest on its debt all along, March marked its first scheduled repayment of principal to creditors. In what was deemed by some to be a cynical move, Jinro defaulted, leading to Goldman's successful court case.
Rice Whine
Following the ruling in favour of the US bank, matters at Jinro have turned ugly. Not only has the firm filed an immediate appeal, and sued Goldman Sachs, but staff at the company have walked out and unions have placed advertisements in the press decrying the court decision and denouncing Goldman as a "vulture fund". For managers at Jinro, the aggressive investment style of Goldman's distressed debt traders has come as something of a shock.
"The court's decision is obviously a conspiracy by the foreigners to kill off Korean ownership of the great Jinro brand," a company spokesman told The Daily Deal, a news website, in May.
Most irate of all is Chang Jin-ho, Jinro's former chairman and currently its biggest shareholder. If Jinro's appeal fails and the company is put into receivership, then he stands to lose heavily as assets are sure to be sold to pay down debt. What's more, argues Chang, he was on the verge of solving Jinro's debt problems, having identified a number of investors ready to sink new money into the ailing company.
For its part, Goldman Sachs disputes such claims. Edward Naylor, director of corporate communications, Asia for Goldman Sachs says: "We never received any information relating to any offers for the company. We pushed the company to reveal the name of this mystery foreign buyer: they refused." Judge Byon Dong-gul of the Seoul District Court appears to have agreed, citing in his decision management's failure to provide concrete evidence of its ability to attract foreign investment.
CSFB, the investment bank hired by Jinro two years ago to assist with asset divestment, disagrees. A senior investment banker who worked with Jinro but declined to be named, says: "We undertook a thorough sales process: we approached 39 separate parties and secured several separate bids for each part of the business."
That said, he acknowledges that the identities of the three selected offers were never disclosed to the creditors or the court. "We were bound by confidentiality obligations," he says. "The court could have forced us to disclose the identities, but they never asked. It was very frustrating. We offered to talk to Goldmans, but [Jinro] refused."
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