Korea's Big Four Banks to Buy $420M in Hyundai Chemical Perpetual Bonds

South Korea's four largest commercial banks have agreed to purchase 600 billion won ($420 million) in hybrid capital securities from HD Hyundai Chemical to support the "Daesan No. 1 Project," a consolidation of petrochemical facilities in South Chungcheong Province.

The creditor group plans to convert a total of 1 trillion won in existing loans into perpetual bonds to accelerate the restructuring process.

Korea Development Bank notified individual banks of their allocations at the second Structural Innovation Support Council meeting held on January 25 and will finalize the plan at its February 18 meeting, according to financial industry sources on February 2.

The allocations are: Hana Bank at 201 billion won, Shinhan Bank at 161 billion won, KB Kookmin Bank at 149 billion won, and Woori Bank at 94 billion won, totaling 605 billion won. Korea Development Bank and Export-Import Bank of Korea will take on 157 billion won and 151 billion won respectively. NH NongHyup Bank will contribute 50 billion won and Sh Suhyup Bank 37 billion won.

Commercial banks will transfer their Lotte Chemical loans, totaling 1.8 trillion won, to HD Hyundai Chemical in the first half of this year, after which the combined entity's perpetual bonds will be converted sequentially.

The four major banks agreed to support the perpetual bond conversion because the debt-to-equity ratio is expected to surge during the Daesan No. 1 Project, potentially jeopardizing future operations. Perpetual bonds are classified as equity due to their indefinite maturity, effectively reducing the debt ratio on financial statements.

"This is to prevent the debt ratio from spiking during the impairment process for idled facilities," a financial industry source said. "Once commercial banks transfer their Lotte Chemical loans to HD Hyundai Chemical in the first half, a total of 1 trillion won in existing loans will be sequentially converted to perpetual bonds starting this year."

The perpetual bond interest rate is expected to be set around 5 percent. Korea Development Bank and commercial banks have reached a consensus to set the rate above current loan rates while keeping it within a reasonable range considering bond market conditions.

According to third-quarter reports last year, Lotte Chemical's borrowing rates ranged from 3.09 to 5.24 percent annually, while HD Hyundai Chemical's rate was approximately 4.5 percent including corporate bonds.

"Existing loans carry interest rates of around 4 percent," a creditor group source said. "The perpetual bond rate should be set higher than existing loans to reflect the increased risk."

However, the rate will likely be lower than perpetual bonds traded in the market. Late last year, petrochemical company Hanwha TotalEnergies issued 500 billion won in perpetual bonds at 6.2 percent. HD Hyundai Chemical's corporate bond credit rating of 'A' is lower than Hanwha TotalEnergies' 'AA-,' which would normally require a higher rate.

But sources say market rates are unlikely to apply directly given this conversion's policy-driven nature aimed at easing the financial burden on the combined HD Hyundai Chemical during restructuring.

"The spirit of providing support from a broader perspective will be taken into account," another creditor group source emphasized regarding rate calculations.

The creditor group is also discussing call option and step-up provisions. While perpetual bonds theoretically have no matyours, they typically include step-up clauses that raise interest rates every three to five years and allow issuers to exercise call options.

"Without step-up provisions, the incentive to repay diminishes," a creditor group source said. "The specific timing and conditions for step-ups will be determined through creditor consensus."

Industry observers expect the combined HD Hyundai Chemical's cash generation capacity to improve only after 2029, even if restructuring proceeds smoothly.

"Considering asset impairments from facility shutdowns during the merger process and the industry downturn, the combined HD Hyundai Chemical will likely recognize substantial impairment losses," said Kim Seo-yeon, senior analyst at NICE Investors Service. "Debt repayment capacity will also remain weak for the time being."