South Korea's four major commercial banks have agreed to acquire 600 billion won ($413 million) in hybrid capital securities, known as perpetual bonds, to support the "Daesan No. 1 Project" consolidating petrochemical facilities in Daesan, South Chungcheong Province. Creditors plan to convert a total of 1 trillion won in existing loans into perpetual bonds to accelerate restructuring efforts.
According to financial industry sources on Monday, Korea Development Bank notified individual banks of their allocations at the "2nd Structural Innovation Support Voluntary Council" meeting held on January 25 and will finalize the plan at a meeting on the 18th.
The specific 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, while Sh Suhyup Bank will cover 37 billion won. Lotte Chemical's borrowings held by commercial banks, totaling 1.8 trillion won, will be transferred to HD Hyundai Chemical during the first half of the year, followed by sequential conversion into perpetual bonds of the merged entity.
The four major banks' support for the 600 billion won perpetual bond conversion comes as the debt-to-equity ratio could surge during the Daesan No. 1 Project, potentially jeopardizing future operations. Perpetual bonds are treated as equity due to their effectively indefinite maturity, 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 explained. "Once commercial banks transfer Lotte Chemical's borrowings 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."
Interest rates around 5% are being considered for the perpetual bonds. Korea Development Bank and commercial banks have agreed to set rates higher than current loan rates while keeping them within a reasonable range considering bond market rates. According to third-quarter reports from last year, Lotte Chemical's borrowing rates ranged from 3.09% to 5.24% annually, while HD Hyundai Chemical's rates were approximately 4.5%, including corporate bonds.
"Existing loans are being provided at around 4% interest rates," a creditor source said. "Perpetual bond rates should be set higher than existing loans to reflect the increased risk."
However, rates will likely be set lower than perpetual bonds traded in the market. At the end of last year, petrochemical company Hanwha TotalEnergies issued 500 billion won in perpetual bonds at 6.2%. HD Hyundai Chemical's corporate bond credit rating is "A," lower than Hanwha TotalEnergies' "AA-," which would normally require higher rates.
However, since this perpetual bond conversion is policy-driven to ease the financial burden on the merged HD Hyundai Chemical during business restructuring, market rates are unlikely to apply directly. Another creditor source emphasized regarding rate determination: "The intent of providing support for the greater good will be considered."
Creditors are also discussing call options and step-up conditions for rate increases. While perpetual bonds theoretically have no maturity date allowing indefinite borrowing, they typically include step-up provisions raising rates every three to five years, with issuers having the right to exercise call options.
"Without step-up provisions, there would be reduced incentive for repayment," a creditor source said. "The specific timing and conditions for step-ups will be determined through creditor consensus."
Industry observers expect that even with full-scale business restructuring, the merged HD Hyundai Chemical's cash generation capacity will not improve until after 2029. Kim Seo-yeon, senior researcher at NICE Investors Service, said: "Considering asset impairments from facility shutdowns during the merger process and weak industry conditions, the merged HD Hyundai Chemical will likely recognize substantial impairment losses. Its debt repayment capacity will also remain weak for the time being."