The CRPA

1
The CRPA An Effective Aid in Cross-Border
Restructurings?

• The recent case of SK Global
• (now called SK Networks)
• Edward Cairns White Case LLP
• 12th November 2003

2
The CRPA Process

• What is it?
• The CRPA is an out of court restructuring
  process available in Korea pursuant to a
  legislative framework (i.e. the Corporate
  Restructuring Promotion Act of 14 August 2001)
• The legislation is new effective from 15
  September 2001
• Has a limited lifespan it is due to expire on
  31 December 2005
• Companies to have debt owing of KRW50 billion
  (about USD40m)
• Covers Korean financial institutions, including
  branches of foreign banks in Korea
• The largest creditor bank is responsible for
  leading the restructuring
• A 3 month moratorium is imposed on CRPA creditors
  (extendable for one month only)
• Lead Bank determines if a restructuring is
  appropriate, and has responsibility for
  developing the restructuring plan
• Restructuring plan requires 75 approval in value
  of CRPA creditors to be passed dissenting CRPA
  creditors can opt out and seek a cash buy-out
  as an alternative

3
SK GLOBAL

• A brief corporate history..
• SK Global was founded in 1953 as Sunkyong
  Textiles, a producer of woven textiles
• In 1980, Yukong Limited (formerly known as Korea
  Oil Corporation) was acquired now known as SK
  Corporation (SK Corp)
• In 1991, Daehan Telecom Limited was founded and
  merged with Korea Mobile Telecom in 1997 to
  become SK Telecom telecommunications became a
  key focus
• In 1998, the Sunkyong Group was re-branded and
  became the SK Group, South Koreas 4th largest
  chaebol
• In 1999, in a reorganisation of the Group, SK
  Corp became the effective holding Co.
• The SK Group was involved in over 2,000 products
  from textiles and clothing to petrochemicals,
  telecommunications and various commodities
• SK Globals main business activities were as a
  Global Trading Co. and Energy Sales. Heavily
  dependent on trading with its affiliates
• SK Global has now changed its name to SK Networks
  and will focus on the provision of
  telecommunications products (primarily fixed line
  services for SK Telecom)

4
The Warning Signs
November 2002

• SK Global fined for irregular option trades with
  JP Morgan

• Commencement of investigation by Seoul District
  Prosecutors Office
• Arrest of the Chairman of SK Corp, Chey Tae-won,
  with respect to suspicious stock deals

February 2003

• SK Global share price fell 40

Late February/Early March

• The Chairman of SK Global, Son Kil-seung, is
  summonsed by prosecutors with respect to their
  investigation

Early March

• Accounting irregularities announced totalling
  KRW1,559 billion (USD1.3 billion)

11 March

• Hana Bank calls meeting under Corporate
  Restructuring Promotion Act (CRPA) at the
  request of the FSS to implement a standstill

12 March

• Korean Banks vote to commence CRPA
• 3 month standstill period commences, effective
  from 11/3/03

19 March
5
Impact of the Asian Financial Crisis

• Reforms were introduced emphasising transparency
  and focus on core businesses the chaebol were
  required to reduce cross-holdings and support for
  unprofitable affiliates
• The SK Group was not as diversified as other
  chaebol that collapsed such as Daewoo and Hyundai
  but it did not learn from the mistakes of these
  groups
• The SK Group was to reduce the affiliates from 45
  to 10 by Dec 1999 it retained 41 and by Dec
  2002 it had 62 as it expanded and diversified
  rather than focused on core businesses
• The Government failed to monitor the activities
  of the chaebol as the Korean economy appeared to
  recover
• Many examples of SK Group raising capital and
  using funds to support, maintain or strengthen
  control over other affiliates SK Global was a
  de facto waste bin

6
The Balance Sheet

• Balance Sheet Position Published Consolidated
• SK Global (unconsolidated) 2002 balance sheet was
  amended following due diligence performed after
  11 March 2003 (commencement date of CRPA) as
  follows

2001 (USDm) 2002 (USDm)
Current Assets 1,995 1,447
Non Current Assets 3,419 3,089
Total Assets 5,414 4,536
Current Liabilities 3,817 3,559
Non Current Liabilities 1,049 1,246
Total Liabilities 4,866 4,805
Equity (Consolidated) 548 (269)

USDm
Equity before due diligence (133)
Net due diligence adjustments (3,522)
Equity after due diligence (3,655)
7
The Debt Picture

• Level of Debt
• The extent of financial institution debt as at 11
  March 2003 can be shown as follows
• Virtually all subsidiary debt was subject to
  guarantees from the parent
• It is significant that the majority of Foreign
  Bank debt was to offshore subsidiaries and not
  subject to the CRPA process in Korea
• Korean Banks held the balance of debt in the
  Subsidiaries

Korean Banks and Institutions No. 93 USDm Foreign Banks No.48 USDm
SK Global (parent) 4,429.1 96.3
Subsidiaries (based outside Korea) 952.2 803.3
Total 5,381.3 85.7 899.6 14.3

8
Early Stages of the Restructure

• The Tokyo Meeting
• Foreign Banks met on 8 April 2003 in Tokyo
• SKG requested an informal stand still whilst the
  restructuring plan was prepared
• A Foreign Bank Steering Committee (FBSC) was
  formed, representing 9 banks Standard Chartered
  Bank was appointed as the lead bank
• Foreign Banks were promised a world class
  restructuring based on international standards
  with full transparency and equality of treatment
  for creditors in similar classes
• Actions of the FBSC
• FBSC protected the SKG Group from hostile actions
  taken by some banks to preserve the status quo
  for the benefit of all Foreign Banks
• FBSC commenced a dialogue with Hana Bank and its
  advisors
• Ferrier Hodgson was engaged as financial advisor
  to the FBSC
• White Case was engaged as legal counsel to the
  FBSC

9
Early Stages of the Restructure

• The Samil Report
• Samil Accounting Corporation (Samil) was
  engaged by SKG / Hana to prepare the
  following
• A Due Diligence Report and liquidation analysis
• Document the restructuring plan
• Prepare an analysis of SKGs new Business Plan
• Foreign Banks were put into a holding pattern
  pending agreeing to a restructuring plan with
  Korean Banks
• At this stage, the FBSC maintained the position
  that they required payment of 100 of their debt
  or a full forensic review to explain the losses
• Whilst these reports and analyses satisfied the
  terms of the mandate set by the domestic
  creditors, they did not provide the Foreign Banks
  with adequate transparency

10
The CRPA Plan

• Negotiation of the CRPA Plan
• Hana Bank focused on negotiating the CRPA Plan
  for the Korean creditors
• Hana Bank had
• to satisfy the Korean Banks
• have SK Corp contribute to the plan and
• provide SK Global with a viable future
• SK Corp
• SK Corp was the effective holding company of SK
  Global and was owed about KRW1.5 trillion
  (USD1.25 bn) with respect to trading between the
  two entities
• But no cross guarantees
• SK Corp required to swap a debt for equity the
  key issues faced were
• SK Corp wanted to keep the swap amount low
• Hana Bank needed the swap high to improve SK
  Globals balance sheet and reduce the haircut for
  the Korean Banks
• Pressure from Korean Banks for an acceptable
  restructuring plan

11
The CRPA Plan

• SK Corp was under pressure from shareholders,
  particularly Sovereign Asset Management (SAM)
  with a 14.99 holding
• SK Corp also under pressure from trade unions and
  other interest groups
• SAM / foreign investors opposed any contribution
  by SK Corp to bailout SK Global
• Negotiations pushed the entire restructure to the
  brink of Court Receivership in early June
• What Was Agreed?
• At the 11th hour SK Corp agreed to a debt for
  equity swap of KRW850 billion (SAM continues to
  oppose)
• Korean Banks agreed to a combination of the
  following
• A Cash Buy Out (CBO) at 30
• 3 types of debt for equity swaps waterfall
  depending on the extent of CBO taken
• Residual debt to be paid after 31/12/07 subject
  to available cash
• The plan was dependent on reaching satisfactory
  agreement with the Foreign Banks

12
The CRPA Plan

• The Effect on SKGs Balance Sheet
• Subject to compromise of guaranteed debt (will
  increase the surplus)
• Total CRPA debt is treated as follows
• 44 is swapped for equity
• 33 is applied to the CBO
• 23 of debt remains on the balance sheet (subject
  to restrictions on repayment)

(Deficiency)/Surplus KRWb
Deficiency per Due Diligence (4,387)
Common stock debt for equity swap SK Corp 850
Common stock debt for equity swap CRPA creditors 850
Profit on CBO i.e. after payment of 30 of debt applied 592
Redeemable Preference Shares (cap of KRW1,000bn) 1,000
Mandatory Convertible Bonds (cap of KRW1,065bn) 1,065
Net Profit for 2003 71
Adjusted Surplus (i.e. Net Assets) 41

13
Documenting the Offer

• After the CRPA Plan was agreed, attention turned
  to dealing with the Foreign Banks
• After several weeks of sometimes difficult
  negotiations, a deal was struck
• Basic term sheet within 12 hours of negotiated
  deal
• 3 weeks then spent negotiating a detailed term
  sheet - points were very difficult to resolve
• Detailed agreements drafted
• The timeline required by the CRPA Plan was
  unrealistic and resulted in
• The first draft of the Exchange Agreement and
  related documents being provided 30 August
• Drafts still materially incomplete and with term
  sheet issues outstanding
• All 48 Foreign Banks being required to sign the
  documents by mid-September
• Substantial work was performed in a very short
  period of time to finalise the documents and
  present them to the Foreign Banks for signing
• But signing was achieved as required in
  mid-September

14
The Outcome

• The Foreign Banks achieved..
• A fully secured return of 48 by way of
• Promissory Notes (43) repayable in full by end
  2004
• Bonds (5) repayable in early 2008
• 115 collateral cover over listed shares / cash
• Warrants to enable participation in equity upside
• Acceptance by 95.8 of Foreign Banks only 2
  Foreign Banks chose not to participate
• Closing as planned at end October 2003
• SK Networks has a viable future (dependent on
  trading with its affiliates)
• The alternative was Court Receivership and
  Worldwide insolvency proceedings - yielding less
  than 20 cents and could have taken years.

15
Court Receivership

• The prospect of Court Receivership was real a
  possibility
• The Court Receivership was to be conducted as
  follows
• a Pre-Packaged proposal would be presented to the
  Court incorporating the majority of the terms of
  the CRPA Plan
• It would be supervised by the Court and therefore
  the CBO was not certain (in order to conserve
  SKGs cash/assets)
• It would pay only 9 over 9 years on the
  shortfall of guarantee claims interest free
  (subject to Court approval) making the
  guarantees worthless

16
The Verdict?

• Was the CRPA an effective aid in achieving the
  restructuring of SK Global?
• Yes but the dynamics in this case were very
  singular
• If this legislation is renewed on expiry with
  more flexibility built in it could be very useful
  indeed but its inherent limitations and
  rigidity will handicap its future usefulness to
  Korean companies with large overseas borrowings