Acquisition loan rates dip to pre-pandemic levels in S.Korea

Interest rates on acquisition financing in South Korea are set to stabilize at the 5% level, rates last seen before COVID-19 swept the world, heightening expectations of a revival in the country’s merger and acquisition market.  

According to sources in the Korean investment banking industry on Tuesday, an STIC Investment-IMM Private Equity consortium is said to have spoken with a major local commercial bank to finance loans to buy the specialty and industrial gas unit of Hyosung Chemical Corp. at a low-5% level interest rate.

The consortium is a preferred bidder for a 100% stake in the specialty gas company worth 1.3 trillion won ($955.2 million), and it is expected to finance about 500 billion won to 700 billion won for the acquisition with a bank loan.

The low-5% rate is considered too low, given that the unit’s parent Hyosung Chemical’s long-term credit rating is BBB+, said an industry observer.

“But it looks highly likely that the consortium will secure funds at a rate at the 5% level,” added the source.

Acquisition loan rates in the 5% range were last seen before the global pandemic hit.

RETURN TO PRE-PANDEMIC LEVELS

The acquisition financing rate drastically shot up during the COVID-19 crisis. In 2020, Affinity Equity Partners refinanced debts borrowed to buy Burger King’s operations in Korea and Japan at rates hitting 10%.

But the rate dropped to the 8% level last year, and then to the 5% level this year.

DIG Airgas Co., formerly known as Daesung Industrial Gases, and DN Solutions Co., the world’s third-largest machine tool maker, are in negotiations with lenders to refinance debts worth 1.8 trillion won and 1 trillion won at rates of 5.7% and 5.3%, respectively. 

Lotte Card Co., the country’s No. 5 credit card issuer, and Lotte Group’s non-life insurer Lotte Insurance Co. have been actively seeking to refinance or recapitalize their debts worth 1 trillion won and 300 billion won, each, in a favorable loan rate environment.

Market observers expect the country’s acquisition loan rate will stabilize below 6% this year as major local commercial banks and securities firms are willing to lend money for acquisitions, which are considered safer loans while reducing riskier investments in equities and real estate.

ACTIVE M&A DEALS EXPECTED IN H2

The move aligns with the Korean financial authorities’ drive to improve the value of local companies with enhanced corporate governance, financial stability and operational efficiency.

Accordingly, commercial lenders have focused on improving their asset quality by reducing riskier assets.

Institutional investors, like securities firms and non-bank financial institutions, are also capable of participating in sell-down deals thanks to their ample liquidity, triggering a race to lower rates.

With the stabilized acquisition loan rates, the Korean M&A market is projected to regain traction later this year, market analysts said.

The IB industry expects the financing rate to acquire Ecorbit Co., Korea’s largest landfill company, to be below 6%.

A consortium of IMM Investment and IMM Private Equity, Carlyle Group, Keppel Corp. and Gaw Capital Partners have joined the final auction for Ecorbit.

Bidders for Air Products Korea Inc. worth 5 trillion won and another major buyout deal SK IE Technology Co. are also expected to benefit from low rates for acquisition loans.

Write to Jun-Ho Cha at chacha@hankyung.com

Sookyung Seo edited this article.