A dispute over Homeplus' rehabilitation is intensifying between controlling shareholder MBK Partners and its largest creditor, Meritz Financial Group, over who is responsible. Uncertainty over rehabilitation is also growing as a court deadline for fundraising overlaps with expectations for the outcome of a prosecutors’ investigation.

The financial investment industry said on June 26 the Seoul Rehabilitation Court demanded that Homeplus submit by June 30 a plan to raise 200 billion won needed to implement its rehabilitation plan.

With the deadline to approve the rehabilitation plan approaching on July 3, concerns are rising that the rehabilitation process could be shaken if it fails to come up with a concrete fundraising plan.

The dispute centres on who will bear, and under what terms, 200 billion won in emergency operating funds needed for Homeplus’ rehabilitation through debtor-in-possession (DIP) financing.

MBK argues that Meritz, as the largest creditor, should join in supporting Homeplus’ operating funds. Meritz, meanwhile, says responsible guarantees and capital injection should come first from MBK and MBK Partners Chairman Kim Byung-joo (김병주).

Meritz counters that MBK has highlighted a failed Homeplus investment while not sufficiently explaining the profits and fees it has earned during fund management. According to Meritz, MBK’s four flagship funds, Funds 3, 4, 5 and 6, are estimated to have generated more than 4 trillion won in total profits over the past decade or so.

In particular, Meritz says Fund 3, which includes Homeplus, maintained a solid return based on the overall fund despite Homeplus’ troubles, and that MBK collected substantial fees during management of that fund.

Meritz believes it should not only highlight claims that losses occurred due to the failed Homeplus investment, but also explain the profits gained and responsibilities as controlling shareholder and manager.

It also argues that the losses claimed by MBK are in the nature of book-value declines or valuation losses in fund investments. It says this does not mean MBK directly bore cash of the same scale from its own capital.

MBK counters that it is not appropriate to conclude its current capacity to provide support based on the size of profits. It says private equity fund profits largely accrue to investors depending on recovery and distribution structures, and that it is wrong to treat unrealised valuation as if it were the manager’s cash-like profits.

MBK stresses that the core of the discussion is not the scale of assets under management or Chairman Kim’s personal wealth, but raising new operating funds to rehabilitate Homeplus.

MBK also says it is already bearing financial burdens of about 400 billion won to normalise Homeplus. It explains that this includes Kim’s cash gifts, guarantees for existing DIP loans, capital support commitments and the waiver of some claims.

It also points to having conveyed its intention to provide joint and several guarantees for 100 billion won of a 200 billion won emergency operating-fund package if Meritz supports Homeplus with that amount.

Meritz, however, also says MBK’s claim of providing 400 billion won in support should distinguish between direct cash injections and burdens that take the form of guarantees and capital support commitments.

Meritz argues that if MBK is confident about Homeplus’ rehabilitation prospects, there is no reason to refuse guarantees by MBK headquarters and Chairman Kim for 100 billion won in DIP financing.

The two sides are also clashing over the possibility of Meritz earning overdue-interest income. MBK claims that if Homeplus is liquidated, Meritz could gain additional profits in the 500 billion won range, including overdue interest. It suggests Meritz could gain greater economic benefits from liquidation than from rehabilitation.

Meritz counters that the claim differs from reality. It says that overdue interest recorded on the books does not mean it can recover the full amount, and that if collateral value falls during rehabilitation or liquidation, even recovery of principal could become uncertain.

Meritz views the occurrence of overdue interest as not maximising profits but as meaning the risk of non-recovery of claims has increased.

Meritz says it will conditionally execute 100 billion won in DIP financing for Homeplus’ rehabilitation. It says it has deposited the funds in an escrow account and can execute them immediately once it confirms that guarantees by MBK headquarters and Chairman Kim are legal and valid.

It adds that it is difficult to accept new loans without guarantees in terms of responsibility to shareholders and subordinated creditors, as well as corporate management accountability.

MBK, meanwhile, says Homeplus needs not 100 billion won but 200 billion won, and urges Meritz to stop shifting responsibility and immediately provide operating-fund support.

MBK says the livelihoods of Homeplus employees and partner companies, suppliers and small business owners are at stake, and that funding execution should take priority over further sparring.

Separately from the rehabilitation process, a prosecutors’ investigation has also emerged as a variable. The legal community said the Anti-Corruption Investigation Division 2 of the Seoul Central District Prosecutors Office is reported to be considering finalising suspect questioning of MBK and Homeplus officials by the end of this month and then deciding how to handle the case, including whether to indict, around the second or third week of next month.

The focus of the investigation is whether MBK and Homeplus management, while knowing in advance about possible deterioration in Homeplus’ finances and a potential credit-rating downgrade, concealed that and had asset-backed securitisation electronic short-term bonds issued and sold, causing losses to investors.

Prosecutors are reported to have recently questioned a Homeplus executive in charge of finance as a suspect. They are reported to have checked whether asset revaluation work involving the executive became the basis for issuing asset-backed securitisation electronic short-term bonds (ABSTB) and how the executive viewed the financial situation at the time.

The industry sees that MBK’s burden could rise as rehabilitation fundraising and the prosecutors’ probe overlap. It says Homeplus’ rehabilitation requires an agreement to share costs between the controlling shareholder and creditors, but the scope for negotiation could narrow as criminal liability also becomes an issue.

A financial investment industry official said Homeplus’ rehabilitation is a structure in which all stakeholders must share losses, but agreement is difficult as the principle of controlling shareholder responsibility clashes with the principle of creditor protection. The official said if a concrete fundraising plan does not emerge by the court’s deadline, the rehabilitation process itself could be shaken.