🚨 Analysis of Homeplus Rehabilitation Procedure and Risk of Principal Loss for Individual Investors

Today Korean Economic News | 2025.03.12

📌 "Surely Homeplus Won't Go Bankrupt" - Individual Investors Face Risk of Frozen Funds?

💬 As Homeplus enters corporate rehabilitation procedures, the possibility of financial debt repayment has become uncertain. In particular, the recovery of principal for Asset-Backed Securities (ABS), Commercial Paper (CP), and Electronic Short-term Bonds invested by individual investors has become uncertain. Financial authorities are investigating the possibility of mis-selling, and principal losses may become a reality depending on the court's decision.

1️⃣ Easy to Understand

As the large retailer Homeplus faces a bankruptcy crisis, investors' money is at risk of being frozen. In particular, individuals who invested believing that "since it's a large corporation, it won't go bankrupt" may suffer significant damage. I'll explain how this situation occurred and what impact it will have on investors.

Homeplus is one of the major large retailers in Korea, a familiar company used by many people. However, recently, its business situation has deteriorated due to the growth of online shopping, changes in consumption patterns, and intensified competition. In particular, the massive debt (about 5 trillion won) incurred when it was acquired from British Tesco in 2015 has been a significant burden.

Homeplus issued various financial products to raise funds, including products that many individual investors subscribed to.

Notably:

1. Asset-Backed Securities (ABS): Securities issued using Homeplus store buildings or real estate as collateral
2. Commercial Paper (CP): Bonds issued for short-term fundraising, usually with maturity within one year
3. Electronic Short-term Bonds: Short-term bonds issued in electronic form

Many individual investors thought these products were safe, believing that "a major domestic retailer like Homeplus won't go bankrupt" while offering higher interest rates than regular bank deposits. However, financial institutions may have already known that Homeplus's financial situation was serious, and suspicions of 'mis-selling' have been raised about selling such products despite this knowledge.

With Homeplus applying for corporate rehabilitation procedures to the court, all repayments of these financial debts have been suspended. During the rehabilitation process, the court will decide on debt adjustment, which may result in investors receiving only part of the principal or delayed repayment. In the worst case, if the rehabilitation plan fails and Homeplus goes bankrupt, investors could lose most of their investment.

This case shows how dangerous the belief that "it's safe because it's a large corporation" can be. Rather than just looking at high interest rates when investing, it's important to carefully check the company's financial soundness, product risk, and the seller's explanation. Financial authorities are currently investigating the possibility of mis-selling by financial institutions, and investor protection measures may be established depending on the results. However, it seems difficult for investors to fully recover the losses already incurred.

2️⃣ Economic Terms

📕 Corporate Rehabilitation Procedure

Corporate rehabilitation procedure is a process where a company facing bankruptcy adjusts its debts and normalizes management under court supervision.

• Creditors' rights to claim are suspended, and an administrator appointed by the court takes over company management.
• The purpose is to restore corporate value through debt adjustment, business restructuring, etc.

📕 Asset-Backed Securities (ABS)

Asset-Backed Securities (ABS) are securities issued based on a company's assets, depending on the cash flow of those assets for principal repayment.

• They can be issued based on various assets such as real estate, accounts receivable, card sales, etc.
• They are often perceived as safer than the company itself because they are typically evaluated separately from the company's credit rating.

📕 Commercial Paper (CP)

Commercial Paper (CP) is an unsecured short-term bond issued by companies for short-term financing.

• The maturity is usually short, from 1-3 months to within one year, and is issued based on the company's credit.
• Being unsecured, the repayment risk increases significantly if the issuing company's credit deteriorates.

📕 Mis-selling

Mis-selling refers to an illegal act of not properly disclosing important information when selling financial products or recommending unsuitable products.

• This includes omitting or distorting important information such as product risk, fees, and possibility of principal loss.
• Legal responsibility may arise for the selling financial institution and may serve as grounds for investor compensation.

3️⃣ Principles and Economic Outlook

💡 Structural Causes of Homeplus's Management Deterioration and the Meaning of Rehabilitation Procedures

• There are several structural causes for Homeplus's management deterioration and application for corporate rehabilitation procedures, stemming from changes in the retail industry and the company's financial strategy.

  • First, excessive leveraged buyout (LBO) acquisition is the fundamental cause. In 2015, private equity firm MBK Partners acquired Homeplus for about 7 trillion won, with a significant portion of this amount funded by borrowed capital. After the acquisition, Homeplus had to bear this debt and pay hundreds of billions of won in interest expenses annually. This was a significant burden on Homeplus's cash flow. The LBO method has the advantage of being able to acquire a large company with little equity capital, but it risks burdening the acquired company with excessive debt. In Homeplus's case, interest expenses often exceeded annual operating profit, creating a financially unsustainable structure.

  • Second, the structural decline of the large retail industry accelerated management deterioration. The rapid growth of online shopping, changes in consumer purchasing patterns, and preferences for nearby small marts due to the increase in single-person households have challenged the large retail store business model. External environmental changes, such as mandatory holidays for large marts and the growth of online delivery platforms, also had negative impacts. Homeplus needed innovation and investment to adapt to these changes but couldn't take sufficient measures to strengthen competitiveness due to excessive debt burden.

  • Third, the limitations of fundraising strategy through real estate sales were revealed. Homeplus adopted a 'sale and leaseback' strategy to secure liquidity by selling store properties and then leasing them back. While this can secure cash in the short term, it has the disadvantage of increasing rent burden in the long term. In fact, Homeplus had to pay tens of billions of won in rent annually after selling its major store buildings. Eventually, measures to secure short-term liquidity resulted in increasing financial burden in the long term.

  • Fourth, applying for rehabilitation procedures is the last resort to save the company. Corporate rehabilitation procedure (court management) is a system designed to give companies in bankruptcy crisis a chance to recover. Creditors' rights to claim are suspended, and debt adjustment and restructuring take place under court supervision. In Homeplus's case, as normal management became difficult due to declining sales and debt burden, it turned to this system. While the rehabilitation procedure is a process to prevent immediate bankruptcy and explore the possibility of business normalization, it also means the possibility of principal loss for creditors.

• These structural causes show that Homeplus's case is not simply a corporate failure but a result of complex factors including excessive debt leverage, failure to respond to changing industry environment, and limitations of short-term financial strategy. Corporate rehabilitation procedure is also a legal process that adjusts losses between various stakeholders including the company, creditors, employees, and partner companies, meaning that all parties involved must accept some sacrifice.

💡 Risk by Investment Product Type and Potential Damage to Individual Investors

• The potential damage to individual investors who invested in Homeplus-related financial products may vary depending on the type and characteristics of the investment product.

  • First, for Asset-Backed Securities (ABS), the degree of loss may vary depending on the value of the collateral assets and legal structure. ABS are securities issued based on specific assets, in Homeplus's case, mainly store buildings or real estate as collateral. Theoretically, as they are evaluated separately from Homeplus's credit risk, there is a possibility of investment recovery if the value of collateral assets is maintained even if Homeplus enters rehabilitation procedures. However, in reality, the amount and timing of recovery may be uncertain due to real estate market conditions, legal complexities of executing security rights, and limitations on security rights within rehabilitation procedures. In particular, if the rehabilitation plan is approved by the court, ABS investors may also be subject to debt adjustment to some extent.

  • Second, Commercial Paper (CP) and Electronic Short-term Bonds are unsecured bonds with very high risk of loss. CP and short-term bonds are unsecured short-term bonds issued based solely on the company's credit. With Homeplus's application for rehabilitation procedures, such unsecured bondholders are placed in a lower priority in the repayment order. Generally, in rehabilitation procedures, unsecured bondholders recover only part of the principal, often repaid in installments over a long period. In the worst case, if the rehabilitation plan fails and Homeplus goes bankrupt, unsecured bondholders may recover almost nothing.

  • Third, whether mis-selling occurred can be an important variable in investor protection. A key issue is whether financial institutions provided appropriate information to investors when selling Homeplus-related products. If Homeplus's financial crisis was already foreseeable but this was not properly communicated to investors, or if the risk was minimized in explanation, it can be considered 'mis-selling'. In this case, legal responsibility may arise for the selling financial institution, and investors may demand compensation for losses. The Financial Supervisory Service is currently investigating this aspect, and there is a possibility of establishing investor relief measures depending on the results.

  • Fourth, investor protection mechanisms and possibilities for legal response are also important considerations. Unlike bank deposits, the deposit protection system does not apply to these investment products. Therefore, investors need to seek legal responses individually or collectively. If mis-selling is recognized, they can file civil lawsuits against financial institutions or apply for mediation through the Financial Dispute Resolution Committee. Also, collective response through investor meetings can be an effective strategy as it increases negotiating power.

  • Fifth, the direction and duration of the rehabilitation procedure will determine the final scale of loss. Rehabilitation procedures are typically long-term processes that take several months to several years. During this period, Homeplus's business improvement, success of restructuring, possibility of attracting new investors, etc. affect the recovery rate for creditors. If Homeplus successfully rehabilitates, debt may be repaid at a higher rate than initially expected, but conversely, if rehabilitation fails and transitions to bankruptcy procedures, the recovery rate will be even lower.

• As such, the potential damage to individuals who invested in Homeplus-related financial products can vary depending on various factors such as the type of product invested in, whether mis-selling occurred, possibilities for legal response, and the result of rehabilitation procedures. What's important is for investors to review all possible legal remedies, continuously monitor the progress of rehabilitation procedures, and seek expert advice when necessary.

💡 Financial Market Credibility and Investor Protection Challenges

• Various challenges to strengthen financial market credibility and investor protection have emerged through the Homeplus case.

  • First, transparency and accountability in the financial product sales process need to be strengthened. Financial institutions should sufficiently explain to investors about the company's financial situation, product risks, and worst-case scenarios when selling investment products. Especially for unsecured bonds like CP or short-term bonds, it should be clearly communicated that there is a high possibility of principal loss in case of company default. To this end, institutional improvements are needed, such as strengthening explanation obligations when selling financial products and introducing risk notification methods in easy-to-understand forms.

  • Second, improving the effectiveness of corporate credit rating and information disclosure systems is important. Homeplus's financial crisis did not occur suddenly but was the result of deterioration over a long period. Nevertheless, there are criticisms that such risks were not sufficiently disclosed to the market. Improvements in credit rating agencies' evaluation methodologies, strengthening corporate financial information disclosure, and establishing early warning systems for potential risk factors are needed. In particular, a separate monitoring system is required for companies that have taken on excessive debt, such as through LBO.

  • Third, enhancing the financial literacy and education of individual investors is essential. Many individual investors suffered damages after investing with the vague belief that "it's safe because it's a large corporation." This is a result of not accurately understanding the risks of financial products. It is important to support investors in making more rational investment decisions through expanded financial education, raising awareness of investment risks, and strengthening the display of risk ratings by product. It is also important for investors to internalize the basic principle that 'high returns come with high risks'.

  • Fourth, establishing institutional mechanisms to prevent similar cases is urgent. For companies acquired with large-scale borrowing like Homeplus, special management of financial soundness is needed. It's also worth considering mechanisms to prevent a company's debt from being excessively distributed to a large number of individual investors. Financial authorities also need to strengthen management and supervision of non-bank financial areas, referred to as 'shadow banking'. Through this, a system should be established to detect and respond to systemic risks early.

  • Fifth, improving investor protection mechanisms in rehabilitation procedures is also needed. In current rehabilitation procedures, the rights of general creditors, except for secured creditors, are considerably limited. In particular, small individual investors find it difficult to actively represent their interests due to lack of expertise and information access. Institutional mechanisms for better reflecting the opinions of small investors in rehabilitation procedures and strengthening public support systems for representing investor interests are needed.

• These challenges can contribute to minimizing investor damage from the Homeplus case in the short term and enhancing the credibility and stability of the financial market in the long term. What's important is a balanced approach that strengthens the basic value of investor protection without hindering financial innovation and market dynamism through excessive regulation. It is hoped that the Homeplus case will serve as an opportunity for the Korean financial market to mature further and for both investors and market participants to act more responsibly.

4️⃣ In Conclusion

Homeplus's application for corporate rehabilitation procedures raises important issues regarding financial market credibility and investor protection beyond the crisis of a large retail company. In particular, as individuals who invested believing "it would be safe because it's a large corporation" face increased possibility of significant losses, questions are being raised about financial product sales practices and the appropriateness of information provision.

Homeplus's management deterioration stemmed from complex factors including excessive leveraged buyout (LBO) acquisition, structural decline of the large retail industry, and limitations of short-term fundraising strategy through real estate sales. These structural problems accumulated over a long period and eventually led to the extreme situation of applying for rehabilitation procedures.

The Homeplus-related financial products invested in by individual investors are diverse, including Asset-Backed Securities (ABS), Commercial Paper (CP), and Electronic Short-term Bonds. Among these, unsecured bonds like CP and short-term bonds become lower priority in repayment during rehabilitation procedures, with very high risk of principal loss. For ABS, recovery possibility may vary depending on the value of collateral assets and legal structure, but still carries considerable uncertainty.

One of the most important issues in this case is whether financial institutions engaged in 'mis-selling'. If information about Homeplus's financial crisis was foreseeable but not sufficiently provided to investors, legal responsibility may arise for the selling financial institutions. Financial authorities are currently investigating this aspect, and investor relief measures may be established depending on the results.

The Homeplus case has brought forth various challenges including strengthening transparency and accountability in the financial product sales process, improving corporate credit rating and information disclosure systems, enhancing individual investors' financial literacy, and establishing institutional mechanisms to prevent similar cases. These challenges can contribute to enhancing the credibility and stability of the financial market.

In conclusion, the Homeplus case is teaching investors that "even large corporations can go bankrupt." Rather than just looking at high interest rates when investing, it's important to carefully check the company's financial soundness, product risk, and the seller's explanation. Financial authorities and financial institutions should also make more efforts to improve systems for investor protection. It is hoped that this case will serve as an opportunity for the Korean financial market to mature further.