🚨 Homeplus CP Issuance Controversy and Financial Market Safety Analysis

Today Korean Economic News | 2025.03.10

📌 CP Issuance by a Company with '1400% Debt Ratio'... Homeplus Situation Resembles LIG and Dongyang Cases

💬 Major retailer Homeplus's largest shareholder, MBK Partners, has likely caused losses to investors by issuing commercial paper (CP) right before filing for court receivership. Similar to past CP fraud cases involving LIG Construction and Dongyang Group, the possibility of criminal punishment is being discussed.

1️⃣ Easy Understanding

It has been revealed that Homeplus's major shareholder sold short-term bonds to investors to raise funds even when the company was on the brink of bankruptcy. This is similar to the LIG Construction or Dongyang Group cases that became major social issues in the past, and many investors are likely to suffer losses. I'll explain why this situation occurred and what it means in easy-to-understand terms.

Commercial Paper (CP) is a type of promissory note issued by companies to raise short-term funds. It's usually issued based only on the company's credit without collateral, and the maturity is typically short, less than a year. From an investor's perspective, it's popular because it allows them to deposit money at higher interest rates than bank deposits.

Homeplus is a major domestic retail company that was acquired by a private equity fund called MBK Partners from British Tesco in 2015. Recently, Homeplus's financial situation has severely deteriorated. The debt ratio has reached 1400%, meaning that for every 100 won of equity, the company has 1400 won in debt, which is a very dangerous level. Generally, a healthy company's debt ratio is evaluated at around 200%.

The problem is that MBK Partners continued to raise funds from the market by issuing CP until right before filing for court receivership, despite Homeplus's financial situation being so serious. This is like a person about to go bankrupt continuing to borrow money despite having no ability to repay. Moreover, most CP investors were likely unaware of Homeplus's actual financial situation.

This behavior is very similar to the LIG Construction case in 2011 and the Dongyang Group case in 2013. At that time, these companies also issued corporate bonds or CP to investors despite severely deteriorated financial conditions, causing harm to tens of thousands of investors, and eventually, their executives were criminally punished for fraud.

The Homeplus case is important because it directly relates to financial market trust and investor protection issues. The CP market is an important channel for companies to raise short-term funds, and if such incidents recur, trust in the entire market could collapse. Also, as many general investors may suffer significant losses after investing in CP expecting high interest rates, there is an urgent need for thorough investigation by financial authorities and institutional improvements to prevent similar cases from recurring.

2️⃣ Economic Terms

📕 Commercial Paper (CP)

Commercial Paper (CP) is an unsecured short-term note issued by companies for short-term funding, an important funding source in financial markets.

• Maturity is usually less than a year, issued for various periods such as 3 months, 6 months, etc.
• Interest rates are determined by the company's creditworthiness, and they are popular among investors due to higher returns than bank deposits.

📕 Debt Ratio

The debt ratio is an indicator of a company's financial soundness, representing the ratio of debt to equity.

• It is calculated as Debt Ratio (%) = (Total Debt ÷ Equity) × 100.
• Generally, below 200% is considered to indicate good financial health, and a higher ratio is considered to indicate greater financial risk.

📕 Court Receivership

Court receivership is a system where a company undergoes rehabilitation proceedings under court supervision when facing financial difficulties.

• Formally called 'rehabilitation proceedings,' it provides an opportunity for companies that struggle to repay debts to normalize their management without bankruptcy.
• During court receivership, creditors' claims are suspended, and an administrator appointed by the court takes over company management.

📕 Capital Markets Act

The Capital Markets Act is a law governing the issuance and trading of financial investment products and investor protection.

• Formally called the 'Financial Investment Services and Capital Markets Act,' it was implemented in 2009.
• It comprehensively regulates matters related to financial investment business operators' business conduct, prohibition of unfair trading, and market supervision.

3️⃣ Principles and Economic Outlook

💡 The Development Process and Structural Problems of the Homeplus Case

• Examining the background and development process of the Homeplus case reveals several structural problems.

  • First, the fundamental cause is the private equity fund's leveraged buyout (LBO) acquisition method and excessive debt structure. When MBK Partners acquired Homeplus in 2015, they used a typical LBO approach. That is, most of the acquisition funds were raised through borrowing rather than equity. Of the 7 trillion won acquisition amount, about 5.5 trillion won was financed through debt, which Homeplus had to shoulder after the acquisition. This caused Homeplus to carry an excessive debt burden from the start, having to bear hundreds of billions of won in interest expenses every year. This is like buying a house mostly with loans and then passing that loan debt onto the purchased house.

  • Second, the major shareholder's pursuit of excessive dividends and asset outflows accelerated financial deterioration. After acquiring Homeplus, MBK Partners took hundreds of billions of won in dividends every year. It is known that MBK Partners received about 2 trillion won in dividends from Homeplus from 2015 to 2023. This shows that instead of reinvesting the company's profits or using them for debt repayment, the major shareholder focused on recovering their investment in a short period. Additionally, as the hypermarket business became difficult, Homeplus raised funds by selling and then leasing back its real estate (sale and leaseback), and a significant portion of this was also outflowed as dividends to the major shareholder.

  • Third, they failed to respond to structural challenges such as online shopping growth and the hypermarket industry decline. Behind Homeplus's difficulties is the decline of the hypermarket industry itself. Traditional hypermarket business models face major challenges due to the rapid growth of online shopping, changing consumption patterns, and hypermarket regulations (mandatory closing days, etc.). However, due to excessive financial burdens, Homeplus could not make sufficient investments in digital transformation and business model innovation. This shows how debt burden can directly affect a company's competitiveness and sustainability.

  • Fourth, reckless fundraising through CP issuance further exacerbated the problem. As Homeplus's financial situation deteriorated, commercial banks strengthened loan screening and restricted new loans. In response, Homeplus raised funds through the CP market, which has relatively loose screening. What's particularly problematic is that they issued CP even when the debt ratio reached 1400% and right before court receivership. This raises suspicions that they raised funds without sufficiently informing investors of the company's actual financial situation.

• These structural problems of the Homeplus case provide an important example of how private equity funds' acquisition strategies, major shareholders' fund management methods, and companies' financial decision-making affect corporate sustainability and stakeholders. In particular, they well demonstrate the negative impact of short-term profit pursuit on long-term corporate value and social costs.

💡 Comparison with Past CP Fraud Cases and Legal Issues

• The Homeplus case has many similarities to past CP fraud cases involving LIG Construction and Dongyang Group, providing important implications from legal and institutional perspectives.

  • First, let's look at the LIG Construction case (2011). LIG Construction continued to issue corporate bonds and CP despite deteriorating financial conditions and a liquidity crisis. Company executives manipulated financial statements and provided false information to deceive investors, and were eventually criminally punished for fraud. The key issue in the LIG Construction case was 'intentionality.' The court applied fraud charges to executives' actions of raising funds from investors while concealing the company's insolvency despite being aware of it. In the Homeplus case as well, key issues could be whether executives were aware of the company's financial situation and the possibility of court receivership, and whether they adequately disclosed this information to investors.

  • Second, the Dongyang Group case (2013) caused more widespread damage. Despite deteriorating financial conditions of its affiliates, Dongyang Group issued corporate bonds and CP on a large scale, causing harm to about 50,000 investors. What was particularly problematic was that Dongyang Securities did not properly notify the risks of the affiliate CP they were selling. The Dongyang Group chairman and other executives were eventually criminally punished for fraud and violations of the Capital Markets Act. In the Homeplus case as well, a key issue could be whether financial institutions intermediating CP sufficiently informed investors about Homeplus's financial situation and investment risks.

  • Third, a major issue under the Capital Markets Act is whether there was a violation of the 'obligation to disclose material information.' The Capital Markets Act stipulates that information that can significantly affect investment decisions must be sufficiently disclosed to investors. Homeplus's serious financial situation, particularly its 1400% debt ratio and the possibility of court receivership consideration, clearly constitutes 'material information.' If such information was not properly disclosed during the CP issuance process, there may be grounds for violation of the Capital Markets Act.

  • Fourth, the possibility of applying criminal fraud charges can also be examined. For criminal fraud to be established, 'deceptive acts' and 'intentionality' must be proven. If Homeplus executives raised funds from investors while concealing or distorting the company's financial situation despite being aware of it, there is a possibility of applying fraud charges. In particular, a key issue will be whether the act of issuing CP until right before filing for court receivership was an intentional deception of investors.

• Comparing with past cases, the Homeplus case raises fundamental legal and ethical issues of financial market transparency and investor protection beyond simple corporate insolvency or management failure. Institutionally, it will serve as an occasion to remind us once again of the need to strengthen information disclosure when issuing CP, enhance intermediary financial institutions' screening responsibilities, and restrict fundraising by insolvent companies.

💡 Policy Tasks for Financial Market and Investor Protection

• The Homeplus case has raised various policy tasks to strengthen financial market stability and investor protection.

  • First, there is a need to strengthen CP market transparency and issuance regulations. Currently, CP has relatively loose issuance requirements and limited information disclosure obligations. Privately placed CP is even less regulated. To improve this system, stricter disclosure requirements for the financial situation of CP-issuing companies, restrictions on CP issuance by companies exceeding certain financial indicators (such as debt ratio), and prohibition of CP issuance by companies under consideration for court receivership or rehabilitation proceedings could be considered. Additionally, establishing an integrated platform to manage CP issuance information is worth considering.

  • Second, strengthening the responsibilities and roles of intermediary financial institutions is important. Intermediary financial institutions (such as securities firms) play an important role in the process of issuing and distributing CP. Institutional mechanisms are needed to ensure these institutions adequately analyze the financial situation of CP-issuing companies and provide appropriate information and risk warnings to investors. In particular, the 'suitability principle' and 'explanation obligation' should be strengthened to recommend products suitable for investors' risk tolerance and investment objectives and provide sufficient information. Additionally, measures to strengthen legal responsibility when intermediary institutions fail to properly fulfill these obligations could be considered.

  • Third, complementary regulations on private equity funds' acquisition strategies and operations are needed. One of the root causes of the Homeplus case was the private equity fund's excessive leveraged buyout (LBO) acquisition method and pursuit of short-term returns. This resulted in sacrificing the company's long-term value and sustainability. To improve this, measures such as restricting excessive borrowing in the acquisition process by private equity funds, limiting dividends for a certain period after acquisition, and strengthening obligations to maintain the financial soundness of acquired companies could be considered. Additionally, information disclosure requirements should be strengthened to increase the operational transparency of private equity funds.

  • Fourth, investor education and financial literacy improvement are essential. It's important to increase investors' understanding of the risks and characteristics of financial products like CP. Many investors perceive CP as a 'safe short-term investment product,' but in reality, it's a product directly exposed to the issuing company's credit risk. Financial authorities and related institutions should strengthen investor education programs and establish information provision systems that make it easy to understand the risk factors of financial products. Particularly with the increase in investments through online platforms, investor protection measures in the digital environment are also an important task.

  • Fifth, improvement of early warning systems and restructuring mechanisms for companies in crisis is needed. A system is needed to detect companies with deteriorating financial conditions, like Homeplus, early and increase their chances of recovery through effective restructuring. The current court receivership system tends to be applied at a 'too late' point in many cases, often implemented after significant corporate value has been destroyed. Institutional support and incentives should be strengthened to allow companies in financial difficulty to restructure earlier and more effectively. Additionally, a restructuring framework that can protect the rights of various stakeholders, including creditors, shareholders, and employees, in a balanced manner should be developed.

• These policy tasks can contribute to preventing investor damage like the Homeplus case in the short term and increasing the reliability and efficiency of financial markets in the long term. What's important is finding a balance that ensures investor protection and market stability without hindering financial innovation and market dynamism through excessive regulation. Continuous communication and cooperation between financial authorities and market participants will be essential to finding this balance.

4️⃣ In Conclusion

The Homeplus case is an event that reveals the structural problems of the Korean financial market and the vulnerability of the investor protection system, beyond a simple financial crisis of an individual company. The act of a company with a debt ratio reaching 1400% raising funds from investors by issuing CP until right before filing for court receivership shows a pattern similar to past LIG Construction or Dongyang Group cases, demonstrating that similar crises continue to repeat in the Korean financial market.

The fundamental cause of this case lies in the private equity fund's excessive leveraged buyout (LBO) acquisition method and pursuit of short-term returns. MBK Partners raised most of the funds for the Homeplus acquisition through borrowing and focused on recovering their investment in a short period through excessive dividends. This caused Homeplus to shoulder an excessive debt burden, and combined with the structural decline of the hypermarket industry, its financial situation rapidly deteriorated.

The problem is that fundraising through CP continued despite this situation. This shows the information asymmetry in the CP market and the inadequacy of the investor protection system. Investors likely invested in CP without accurately understanding Homeplus's actual financial situation and are expected to suffer significant losses as a result.

This case has brought to the fore various policy tasks, including stricter regulations on CP issuance, strengthening the responsibilities of intermediary financial institutions, increasing transparency in private equity fund operations, and expanding investor education. In particular, institutional mechanisms are needed to restrict CP issuance by companies with deteriorating financial conditions and ensure that sufficient information is provided to investors.

Additionally, from a legal perspective, there should be a thorough investigation into whether Homeplus's major shareholders and executives violated the 'obligation to disclose material information' under the Capital Markets Act or committed criminal fraud. As seen in past LIG Construction or Dongyang Group cases, strict legal responsibility should follow actions of raising funds by concealing or distorting the company's actual financial situation to investors.

The financial market operates based on trust. If investors cannot trust the information provided, the function of the market itself deteriorates, and efficient allocation of capital cannot occur. What the Homeplus case shows is that actions undermining this market trust for short-term profit pursuit are still occurring.

In conclusion, the Homeplus case is an important event that once again reminds us of the need to strengthen the transparency of the Korean financial market and the investor protection system. Thorough investigation and accountability by financial authorities, and urgent institutional improvements to prevent similar cases from recurring are needed. At the same time, investors should also develop prudent investment habits by fully understanding the risks of investment products and carefully examining companies' financial situations, rather than just chasing high returns.