Liquidity crisis looms at S.Korea’s M Capital amid project financing debacle

South Korea's financing and finance leasing firm M Capital Co. is facing a growing risk of liquidity crunch as its attempts to refinance maturing debts have hit a snag following its credit outlook downgrade amid the country’s ongoing real estate project financing debacle.

According to the country’s investment banking (IB) industry on Monday, M Capital is due to repay 219.1 billion won ($160.1 million) in debts maturing at the end of this month. Its total borrowings due this year amount to 850 billion won.

But the Korean finance company, offering payment assistance with financing and leasing services, has failed to refinance existing debts with new borrowings or asset securitization after multiple credit agencies downgraded the company’s credit outlook to "Stable" from "Positive." Its rating remains at A-.

Borrowing cost has also shot up to over 6% since early this year, while demand for corporate bonds issued by credit and finance firms has weakened.

According to IB industry observers, the main culprits behind the credit outlook downgrade were Korea’s growing real estate project financing risk stemming from the country’s construction market slump, as well as moral hazard issues related to the company’s largest stakeholder STLeaders Private Equity Co.

REAL ESTATE PROJECT FINANCE RISK

In 2020, M Capital was acquired by STLeaders for 375 billion won through a fund invested mainly by the Korean Federation of Community Credit Cooperatives (KFCC).

The mutual financial institution was the anchor liquidity provider of the fund with a 59.8% investment, while the PE firm was the fund's general partner (GP).

Since the acquisition, M Capital has joined a series of project financing loan deals organized by KFCC.

Its total financial assets, including project financing loans, under management nearly quadrupled to 1.21 trillion won as of the end of 2023 from 332.8 billion won at the end of 2020.

But the Korean real estate project financing market has entered a downturn with rising delinquencies amid the prolonged slump in the country’s real estate market, stoking concerns that M Capital would lose from its bad financial assets.

To prevent any risky situation, KFCC came forward to aid M Capital with a collateralized loan worth about 230 billion won on the latter’s financial assets.

LP-GP DISPUTE

But it offered the loan option on the condition that STLeaders gives up the finance company’s management control, citing the PE firm’s moral hazard issues.

STLeaders’ management was embroiled in a scandal of bribing some KFCC officials for the M Capital acquisition deal in 2020. Its Chief Executive Officer Choi Won-seok was sentenced to a jail term of one and a half years for the case. Other officials from the PE firm were also arrested.

STLeaders has, however, rejected KFCC’s offer.

The mutual financial institution has also attempted to remove the PE firm from M Capital management with other LPs. But that has not succeeded, either, due to opposition from some LPs.

Since then, STLeaders has been seeking to finance M Capital through a collateralized loan. At the same time, it has put the finance company up for sale.

But all of its efforts have been stalled in the absence of an enthusiastic investor, brewing controversy over its stance on M Capital.  

“Without (M Capital’s) investment asset, STLeaders could be kicked out of the capital market,” said an official from the IB industry. “The PE firm seems to be holding onto it to earn fund management fees.”

Write to Jong-Kwan Park and Jun-Ho Cha at pjk@hankyung.com

Sookyung Seo edited this article.