LIQUOR AND LIQUIDITY
Bad debt problems still plague Asia, but a court case in Korea hints at a new commitment to reform.
By Chris Leahy

For 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."

That may well be true, argues Goldman Sachs, but the fact that Jinro refused to reveal its potential investors or to talk about asset disposal plans raises questions about just how seriously managers were considering such proposals. Others in the market agree. Several contacts at private equity firms confirm that good prices were being tabled for some of Jinro's businesses and speculate that Jinro shareholders were reluctant to break up their faltering empire.

Hangover Cure

Still, say many who have followed the case, the fact that Jinro now looks likely to be broken up is good news. "A lot of people are watching this one closely," says a partner of a leading international buyout firm that has run its slide-rule over Jinro. "The court decision was right: the business needs restructuring, it's clearly over-leveraged and the issue needed to be forced."

Justin Ferrier, a director at ADM Capital in Hong Kong, one of Asia's leading distressed debt asset managers agrees: "The Jinro brand was being debased. Management is unhappy, the workers are unhappy, nothing has happened for five years. Goldman are doing exactly the right thing, they're making something happen."

Sadly, while the Jinro case is making waves in Korea, it's unlikely to cause a splash elsewhere in Asia. Just look at the drawn-out creditor negotiations surrounding Asia Pulp & Paper (APP), the Indonesian packaging and stationery giant with US$14 billion of debt. Similar attempts late last year by BNP Paribas and Deutsche Bank to force a court-appointed administrator to run APP in Singapore failed. The saga continues.

And then there's the case of Thai Petrochemicals Industry (TPI), Thailand's biggest oil and gas concern. Saddled with almost US$7 billion of debts, TPI is another victim of Asia's financial crisis that refuses to be fixed. A consortium of 140 banks - represented in negotiations by International Finance Corporation (IFC), US banks Export-Import Bank and Citibank and Germany's Kredietanstalt fur Wiederaufbau - have been battling for five years now to successfully restructure TPI's debt repayment schedule. And yet, despite controlling some 75 percent of TPI's equity, so far they have failed.

The reasons? Many stand out, but chief among them are the political maneuverings of former controlling shareholder Prachai Leophairatana - now left with just a 12 percent stake in TPI. Since March 2000, TPI had been in the hands of Effective Planners Limited (EPL), a subsidiary of Australian insolvency firm Ferrier Hodgson. On April 21, however, Prachai managed to persuade Thailand's Central Bankruptcy Court to take the company out of administration and put him back in control. Since then, TPI has already skipped a scheduled US$8.5 million interest payment.

"We were happy with the work EPL were doing," says Desmond Dodd, spokesman for IFC, TPI's largest foreign creditor. He can see no good reason for Prachai to be reinstated and is certain that it bodes poorly for foreign creditors. As he calls it, the decision appears to have been influenced by Prachai's political connections, and contravenes Thailand's bankruptcy laws that allow creditors holding two-thirds of a company's outstanding debt to nominate their own insolvency managers. "We don't agree with the arguments leveled by the government - they are not consistent with other bankruptcy procedures," says Dodd.

Other commentators agree. Vincent Milton of Fitch Ratings in Bangkok, observes: "The TPI situation could be a serious setback for this country." Conversely, the Jinro situation looks set to boost opinion about Korea in the financial markets. David Marshall, managing director of Fitch Ratings in Hong Kong holds up the Jinro case as a positive sign which "shows how strong the political will to reform is in Korea, and that the legal system works." Thailand, and other parts of Asia, would do well to take note.