NPS rejects $177 mn debt for Carlyle’s refinancing of ADT Korea

The National Pension Service’s (NPS) rejection last week of 200 billion won ($177 million) investment in ADT Korea, owned by the Carlyle Group, has caught domestic institutional investors off guard, raising concerns that the pension fund’s overly cautious attitude may put a dent on alternative investment markets.

The alternative investment committee of the South Korean pension fund decided on Feb. 22 not to participate in the 480-billion-won refinancing of ADT Korea, which was intended to pay off 150 billion won in subordinated debt and distribute the remainder to its investors. NPS was supposed to become an anchor investor by acquiring 200 billion won worth of three-year subordinated debt for an interest income of 7.24% a year.

The decision by the world’s third-largest pension fund dealt a blow to the Carlyle Group’ recapitalization plan for the securities service company, and came on the heels of other major alternative investment proposals turned down by the NPS since last July: a joint acquisition of France’s Nice airport, and investments in an aviation financing fund and a property development project in central Seoul.

Investment banking sources said that the NPS’ rejections of those proposed investments were not based on economic logics, but reflected a shift in its attitude.

As the NPS has been involved in the country’s widening corruption scandal over its 2015 backing of a controversial merger between two Samsung Group units, then the CIO and executives, who had participated in the decision, were investigated by a special prosecutor’s team. The probe led to the arrest of its ex-Chairman Hyung-pyo Moon who stepped down this month. Further, dozens of experienced asset management employees have quit around the time the fund management office moved to a small city last Saturday.

“The atmosphere is that we won’t make any decision in favor of investments which could bring controversy,” an NPS source told the Korea Economic Daily.

Some of the members at the NPS’ alternative investment committee were known to cite the investment losses it suffered last year from a domestic cable TV operator as a reason for opposing its participation in the refinancing of ADT Korea.

Carlyle had acquired 100% of ADT Korea for $1.93 billion in 2014. The following year, the securities service firm had raised 1.3 trillion won in senior debt and 150 billion won in subordinated debt. After the attempted sale of the South Korean firm fell through last year, Carlyle turned to the refinancing plan.

Subordinated debt investors may face their principal losses when the enterprise value of the invested company dwindles by over 30% within the first three years of investment. But the industry sources played down the possibility of ADT Korea's subordinated debts incurring losses, citing the oligopolistic structure of the country’s securities service market and its solid earnings.

ADT Korea’s enterprise value is estimated at 2.5 trillion won, applying the same multiple of 10 times to its end-2016 EBITDA as its local rival S-1 Corporation.

By Chang Jae Yoo and Donghun Lee

yoocool@hankyung.com