Crisis of Tong Yang Group
Cash-strapped Tongyang Group is now willing to sell its affiliates, but it will be not easy for the group to remove liquidity risk. It is due to the fact that the 38th-largest conglomerate in Korea needs more than 1 trillion won to repay maturing debt such as bonds and commercial paper within three months. In addition, the proceeds from the sales of its subsidiaries will be not enough to cover debts worth more than 3 trillion won.
Belated Decision to Sell Tongyang Power, Tongyang Securities
According to sources in the investment banking industry on September 25, the net debt owed by the group’s non-financial units amounted to 3.1 trillion won (US$2.9 million) as of 31 December 2012. In particular, commercial paper, whose maturity date arrives before the end of the year, approaches 800 billion won (US$745 million), while corporate bonds exceed 300 billion won (US$279 million). Since Tong Yang needs to secure more than 1 trillion won (US$930 million) within the year, it has decided to sell its affiliates.
Currently, the subsidiaries that can be sold are Tongyang Power and Tongyang Securities. Another affiliate, Tongyang Magic, which specializes in producing kitchen appliances, selected KTB Private Equity (KTB PE) as a preferred bidder for its business sales in July. But the contract has yet to be finalized.
KTB PE offered 250 billion won (US$232.7 million). However, the group will finally obtain only 120 billion won (US$112 million), after excluding debt and the amount of investment in shares. Tong Yang has tried to sell ready-mixed concrete plants and golf clubs, but to no avail.
Even with the sales offer of Tongyang Power and Tongyang Securities, the market thinks that the group missed the boat. Tongyang Power, which owns the Samcheok thermal power plant, is considered to be the group's nucleus. Thus, Tongyang tried to keep the company. Nevertheless, the group ended up offering to sell the entire stake in its power unit valued at 1 trillion won (US$930 million). But the market considers the gesture to be too late.
An official in the investment banking industry said, “The rumor about Tongyang Group in crisis is not new. If the group sells Tongyang Power in this situation, it will be difficult to get the right sales price.”
The industry has picked POSCO Energy, Samtan Co., and GS Energy, which is also on the shortlist for the STX Energy sale, as contenders for the acquisition.
However, unlike Tongyang Power, Tongyang Securities is not expected to attract candidates for its business sales any time soon. It is attributable to the company's increased risk, such as its deteriorating reputation arising from its prolonged role as the core affiliates that finances and supports the group. Its profit-generating ability is also thought to be decreased.
The head of the investment banking division of a securities firm commented, “The situation that the securities industry faces is not good. Besides, Woori Investment & Securities is already for sale. So, it will not be easy for Tongyang Securities to find an acquirer.”
The shares of Tongyang Securities for which Tong Yang Leisure Co. and Dongyang International have account for 34% of total shares, worth about 200 billion won (US$186 million).
Sales Offer of Core Units, but Reversal of the Situation Not Expected
In spite of the sales offer of its subsidiaries, the deal is not likely to be realized soon. Generally, it takes at least three months for the merger and acquisition process to be finalized from a sales announcement to the selection of a preferred contender. Since bonds and commercial paper worth 1 trillion won (US$930 million) are due to mature at the end of this year, the timing is not on Tongyang's side. Therefore, the group has no choice but to use government-backed loans so as to avoid bankruptcy, but it is not easy to find justification for the loans.
An official in the credit rating industry pointed out, “The best scenario is that the group will proceed with sales deals while continuously paying off its maturing debt. But it will be hard to issue corporate bonds, and take out loans from banks. So, the scenario will be difficult to be realized.”
A source in the investment banking industry also said, “It will be not easy for Tongyang Group to sell Tongyang Cement & Energy. I think that the group will file for court receivership in the end.”