The story of Haitai Confectionery is an object lesson in the virtue of resisting the temptation to hurl the healthy baby out with the soiled bathwater.
The story dates back to the midst of the Asian crisis in 1997 when the Haitai Group, reeling under a mountain of some $3bn in unserviceable debt, was declared bankrupt. To John Seal, managing director and chief executive officer at ABN Amro in Hong Kong - which advised Haitai's bank creditors - that made the Haitai Group a classic casualty of the misdirection of resources that was one of the key contributors to the turmoil that exploded in 1997.
While the Haitai Group as a whole may have been in an ungodly mess by the late 1990s, the jewel in its crown, Haitai Confectionery, assuredly was not. After all, since 1956, as the company has reminded potential backers in its promotional material, it has virtually single-handedly kept thousands of Korean dentists in business, manufacturing vast quantities of sweets and biscuits, products in which by the end of the 1990s it commanded a 24% market share.
In 2000, while the Haitai Group itself was floundering in bankruptcy, its confectionery subsidiary, concentrating almost exclusively on the domestic market, turned over $442m and posted profits before interest and tax of $33m.
The snag was that the company's success in its confectionery brands had encouraged it to branch out into a number of totally unrelated areas such as electronics, dairy products and construction.
"The brand had undoubtedly suffered because of misdirected investment at the holding company level," says Seal. "It was the classic Asian bull market story of borrowing money and channelling it into the wrong areas, as a result of which the core franchise suffered, investment was hampered, and the brand's market position had declined."
The first Act
Although the group's confectionery franchise was therefore clearly an attractive proposition for private equity investors, Seal and others point out that legislative change allowing for speedier restructuring was essential if essentially healthy companies such as Haitai Confectionery were to be carved out of ailing chaebols and rehabilitated.
That legislative change came in the form of the Korean Corporate Reorganisation Act, and the Haitai restructuring was the first pre-packaged plan to have been implemented under the act, which allows creditors to agree on the form of the restructuring before its submission to the courts for approval.
"The law process was essential," says Seal. "To say that the restructuring process had ground to a halt would be an exaggeration, but it had certainly lost momentum. In any country in which there is strong social cohesion managing corporate restructuring is very complicated and challenging, and in the case of Haitai being able to present a restructuring plan in toto, as opposed to having to negotiate ad nauseam with unions, management, shareholders and creditors, was absolutely vital."
That process allowed a consortium of CVC Asia Pacific, JP Morgan Partners and UBS Capital - bidding against others and working as partners on a transaction for the first time - to establish a newco, Haitai Food Products, in March 2001, which agreed to buy the confectionery division of the Haitai Group for $321m while assuming no responsibility for the group's broader debt mountain.
Each private equity partner took an equal 33.3% stake in the new company, with the debt component of the LBO finance arranged by JP Morgan and Korea's Cho Hung Bank in a transaction that bankers say formed an invaluable template for future leveraged deals in the region.
Seven year pitch
There were a number of notable firsts associated with the syndicated loan facility, one of which was its inclusion, for the first time in an Asian LBO, of a tranche with a seven year tenor, accounting for W79bn of the total loan package and paying 350bp over three year corporate bonds, or Libor plus 375bp.
The rest of the debt package was made up of a W160bn five year tranche priced at 250bp over corporate bonds (300bp over Libor) and a W75bn revolver also at 300bp over the corporate bond benchmark.
An important by-product of this maturity structure, and another first for an Asian LBO, was the diversity of the investor base attracted by the deal.
"In the Haitai transaction, together with our partner, Cho Hung Bank, we were able to further enhance the financing package for our clients by offering a back-ended seven year tranche in addition to the amortising five year bank tranche," explains Chris Gammons, vice president of debt capital markets at JP Morgan in Hong Kong, who spearheaded the transaction. "This way we were able to more accurately target institutional investors who needed to match assets with their liability profiles, for the long term tranche.
"The Haitai syndication continued the trend begun in Mercury of attracting a broad range of international and domestic lenders. Nine European and Korean banks joined as sub-underwriters, four commercial banks bought the five year tranche and five institutions filled out the seven year tranche. Haitai heralded the arrival of the 'B' loan or institutional tranche in Asia."
Even though the newly restructured Haitai Confectionery has only been operating for a matter of months, the investors who put up the equity say they are delighted with what it has accomplished in that time - supported by a cluster of hands-on private equity investors who, among other things, made some critical early additions to the company's management team.
Andrew Liu, chief executive officer at JP Morgan Partners in Hong Kong, explains that one of the investors' first priorities was to appoint a new CEO, Suk Cha, who brought with him experience from Procter & Gamble's Korean operation.
"We set out a range of strategic objectives with the new board very early, which included reducing the number of brands, changing the distribution channel and rationalising the manufacturing and production processes, and in all those areas the management team has exceeded our original expectations," says Liu. *