A presentation to:

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A presentation to
The World Bank
Corporate Restructuring Fund The Korean Case
Christopher Vale Chief Investment Officer
Asia Rexiter Capital Management
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Rexiter Capital Management
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Introduction to Rexiter Capital Management

• Rexiter is a Global Emerging Markets Fund Manager
  with funds under management of approximately
  USD1bn founded in 1997
• Rexiter is owned 25 by its employees and 75 by
  State Street Global Alliance LLC, a joint venture
  between State Street and ABP (largest Dutch
  Pension Fund)
• Headquartered in London, Rexiter also have an
  office in Korea staffed by two senior fund
  managers and three Korean analysts seconded from
  its local sub-adviser (Hansset)

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Government Objectives Corporate Sector Reform

• In 1998 crisis led the Korean Government to
• Encourage SMEs
• Dismantle Chaebols
• Improve corporate governance
• Improve balance sheets

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Opening up of Korea - Foreign Investment Ceilings
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Korea - Weight In MSCI AC Far East Free ex-Japan
Index
Korea first entered the MSCI regional indices at
the end of January 1992, at 20 of market
capitalisation. At the end of September 1996,
the inclusion factor was raised to 50 of market
cap, at the end of August 1998, to 100 MSCI
ACFEFJ 1/92 12/95 11/99 Korea 5.1
4.5 25.1
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Background to the Korean Corporate Restructuring
Funds (CRFs)

• One of the policy initiatives taken by the Korean
  Government to counter the economic crisis that
  befell Korea in 1997/1998
• The CRFs consisted of four funds totalling
  USD1.3bn. State Street, Templeton and Scudder
  received USD250m each in balanced mandates.
  Rothchild Inc. received USD500m in a debt
  mandate
• The funds were provided by 23 Korean Financial
  Institutions co-ordinated by the Government owned
  Korea Development Bank
• The CRFs were targeted at small and medium sized
  Korean companies
• Money received on 1st November 1998

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Investment Guidelines of the Korean CRFs (1)

• Must invest in newly issued debt or equity thus
  private equity in nature
• Should focus on
• technology
• exporters
• venture companies
• work-outs (subsequent request by MOF)

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Investment Guidelines for the Korean CRFs (2)

• Investment prohibited in the following
• Five largest business groups (Chaebol)
• Government owned institutions eg Kepco and Posco
• Property, Finance and Insurance companies
• No more than 50 of the funds in 6th 30th
  Chaebol

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Portfolio Characteristics of the Korean CRFs

• 10 maximum in a single company (I.e. 25m
  maximum investment size)
• 25 maximum in any 6th 30th chaebol
• 25 maximum in any sector
• Minimum number of investments 25 (ie average
  maximum investment 10m)
• Maximum ownership 49 of any company (ie minority
  positions only)
• Minimum investment debt or equity 30
• Unlisted investments had to be between 5 and 30

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Cost Analysis for the CRFs

• Management Fee
• Performance Fee
• Must employ local advisory firm
• Must maintain office in Korea
• Must invest 50 by April 1999 (within five
  months)
• Must invest 80 by July 1999 (ie within nine
  months)
• Initial two year contract

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Structure of Arirang CRFs

• Mutual Funds in theory had to list within 12
  months
• Reported to a Board of Directors, chaired by
  Korea Development Bank
• Custodian and Administrator KDB (and
  subsequently A Brain)
• Manager State Street
• Sub-Adviser Hansset Global Advisers

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Arirang Restructuring Fund - Investment Process

• Introduced to Potential Investee Companies
• Screen 300 companies
• SSgA visit 100 companies
• Sign Letter of Intent and Confidentiality
• Establish financial projections and verify
  assumptions used
• See customers of potential investee companies
• Sign Term Sheet
• Propose Investment to Investment Committee
• Negotiate Final Terms and Contract

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Review of Arirang Corporate Restructuring Fund

• Made 40 investments, 16 unlisted, 6 IPOs
• 2 major work-outs, 10 Venture, 13 Kosdaq, 11
  KSE
• Made capital distributions every June
  totalling KRW 220bn (approx 190mn )
• Fund currently worth KRW 173bn (approx
  147mn)
• All listed investments to be sold and
  distributed to shareholders by Sept 04.

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Arirang Characteristics
As at December 3, 1999
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Korean CRFs - Positives

• Provided much needed capital quickly to many
  smaller companies when
• Banks couldnt lend
• Equity Market was too low for rights issue
• Policy goals met in terms of economic recovery,
  maintaining employment.
• Improved balance sheets
• Improved corporate governance investments
  usually incorporated
• Veto on debt/equity issuance
• Veto on Capex
• Board seats
• Tag-along rights
• Monthly reports
• Improved investor relations (IPOs at higher
  prices in Arirang invested)
• Managers had investment discretion

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Korean CRFs - Negatives

• Fund structure could be improved
• Mutual funds vs closed funds
• Distributions
• Fees
• Political football constant criticism by
  opposition parties hindered objectives.
• Range of investments too wide (venture,
  work-out).
• Balanced of fund size/No of investments not quite
  right.
• Too many other funds CBO funds, Venture funds.
• Korean banks (write-offs, collateral).
• Chaebol influence, family and alumni influence.
• Legal background.

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What is Required To Make CRFs Work In Other
Countries?

• Funds to be raised internally Policy vs
  Performance dilemma.
• Reasonably large economy (number and size of
  companies)
• Investment discretion for Fund Managers.
• Liquid stock market for exits.
• Appropriate fund and fee structure.
• Clear and appropriate investment guidelines.
• Acceptance of best practice Due diligence
  requirements.

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Appendix Investment Examples
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Investment Example - Telson

• Kosdaq - listed mobile handset manufacturer
• CDMA licence with Qualcomm
• Manufacturing alliance with Motorola
• Sales forecast to rise from KRW77bn in 1998 to
  over KRW 300bn in 1999
• Needed capital to offset debt used to build new
  factory (opened April 1999)
• Arirang subscribed US5m in a November 1998
  convertible bond issue for 8 stake. Converted
  December 1999.

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Investment Example - Motor Technology

• Kosdaq listed motor manufacturer
• stepping motors used in CD Roms, FDDs and air
  conditioners
• possibilities for vibrating motors used in
  mobile phones
• Needed capital to reduce debt and expand Chinese
  factory
• Arirang subscribed US6.4m at 3 times the share
  price for a 21.6 equity stake
• Arirang took up a US1m rights issue.

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Investment Example - Sewon

• Mobile Handset manufacturer
• CDMA and GSM licence
• agreement with SK Telecom
• Small MP3 business
• Needed funds to reduce debts incurred in setting
  up factory and for working capital
• Arirang subscribed US7.3m in equity for a 14
  stake
• Listed on Kosdaq in November 1999.

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Work-Out Example - Chefline Corporation

• Introduction - the Original Investment
• The Corporate Restructuring Funds (CRFs) were
  encouraged to execute at least one pure financial
  restructuring of a troubled company in the course
  of investing their funds.
• The Arirang investment in Chefline Corporation
  (Chefline) in July 2000 represented a financial
  restructuring investment.
• Chefline had agreed a work-out programme with
  creditors in April 1998 which collapsed shortly
  thereafter - Chefline then went into
  court-receivership (Hwa-eui).
• In July 2000, Arirang invested W4.6bn in equity
  for 922,350 shares or a 48.99 holding, and
  W7.695bn in convertible bonds this was part of a
  comprehensive restructuring.
• This investment was the culmination of 18 months
  highly complex negotiations with 41 bank and
  non-bank financial institutions, the secured and
  unsecured creditors the transaction involved a
  merger of two companies, a capital reduction,
  goodwill write-offs and debt rescheduling out to
  2015 and 2019, all of which had to be agreed by
  the creditors, certain of whom had their own
  financial problems.
• The Arirang equity investment proceeds were used
  for working capital, and the convertible bond
  proceeds were used to redeem 10 of the
  outstanding secured and unsecured liabilities.
• The Arirang investment decision was predicated
  upon a hoped for strong recovery in the companys
  sales and earnings to pre-crisis levels, and a
  consequent ability to service the rescheduled
  liabilities.
• In July 2001, Mukoonghwa invested W2bn in a
  convertible bond to provide additional working
  capital - this CB is outside the transaction
  described herein.

A Complicated First Phase Restructuring concluded
in July 2000..
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Restructuring Example - CNI, Inc. (1 of 2)

• General Background
• Established in August 1990 as a small receipt
  mini-printer manufacturer and computer network
  software company with capital of W100m and 13
  employees
• In 1992 entered the CAT (Credit Authorisation
  Terminal) business
• In 1996 established subsidiary Wide Telecom to
  develop pager products founded IT Information
  (Intelligent Building System), and merged with
  Seoul Information Co to strengthen mini-printer
  marketing
• In 1997 CNI listed on KOSDAQ paid-in capital
  increased to W2.7bn with 540,000 shares in issue
  (Soon Lee, President held 51,104 shares - 9.46)
• Also in 1997, CNI merged with IOTel to acquire
  pager and wireless data communication technology
  and established Puloon Technology to manufacture
  bank note sensors

CNI met every criterion for investment by a CRF.
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Restructuring Example - CNI, Inc. (2 of 2)
Communication Network Interface, Inc. - CNI

• By 1998, CNI had three main divisions
• Communication Software Division communication
  software from host computer to PCs
• Finance/Transaction Automation Division CATs,
  mini-receipt printers, IC card terminal
• Wireless Data Communication Division pagers,
  wireless data modems and two-way messenger
  terminals (the data transmission service provider
  was Airmedia)
• In 2H-1998, CNI provided the following income
  projections in their Investment Memorandum with
  wireless data accounting for 50 of
  revenues. W m 1997a 1998e 1999e 2000e 2001e 200
  2e Sales 24,935 25,000 45,000 65,040 90,000 120,0
  00 EBIT 2,247 3,528 7,008 9,768 15,900 22,428 Ne
  t Income 761 732 3,480 5,592 10,320 15,516
• CNI qualified under CRF investment guidelines a
  venture company in technology with export
  potential. The original investment of W15bn was
  4.5 of Arirangs paid-in capital, the W25bn
  investment amount post-rights issue was 7.5 of
  Arirangs paid-in capital.

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CNI - Arirang Milestones
History of the Arirang Investment in CNI
Feb 1999

• 416,667 shares at W24,000/sh invested amount
  W10,000,008,000 for a 38 stake at a 18.6
  discount to the market price. Shares had W5,000
  par value.
• 2,083,330 shares at W2,400/sh invested amount
  W4,999,992,000 for a 16 stake. Shares had W500
  par value following 101 stock splitTotal
  holding 6,250,000 shares for a 48.5 stake.
• Rights issue of 0.3435876 new to 1 old share at
  W5,060/sh Arirang took up its rights subscribing
  to 2,147,422 shares for a consideration of
  W10,865,955,320.Total Arirang holding 8,397,422
  shares for an invested amount of
  W25,865,955,320. Percentage holding in CNI is
  unchanged.
• Disposal of the rights shares in the market
  2,147,422 shares sold at an average
  W6,943.8/share to realise W14,911,300,680.
  Arirang holding 6,250,000 shares for a 33.2
  stake.
• Disposal of 2,000,000 shares in the market at
  W5,511.8/sh raising W11,023,508,780. Recovery
  totals W25,934,818,460 Arirang holding 4,250,000
  shares for a 21.2 stake.
• Disposal of 4,250,000 shares by competitive
  auction/block trade at W440/sh to raise
  W1,870,000,000. Total recovery is
  W27,804,878,460, or a gross return of
  W1,938,863,140 or 7.5 on invested amount

Mar 1999
Aug 1999
Nov 1999
May 2000
Mar 2003
Arirang was the major shareholder in CNI from
the date of its initial investment in Feb 1999
until its final exit in March 2003 and made best
efforts to exert influence over management.