Homeplus wins time, not turnaround

The Seoul Bankruptcy Court has resumed corporate rehabilitation proceedings for Homeplus, after the retail chain secured 200 billion won ($130 million) in debtor-in-possession (DIP) loans from financial institutions affiliated with Meritz.

The decision came as a huge relief for Homeplus employees, as well as workers in related services such as cleaning and security, and thousands of small and medium-sized suppliers. Yet the resumption of rehabilitation proceedings does not guarantee that the hypermarket chain — once the nation's second-largest retailer at its peak — will successfully graduate from court supervision and return to normal business operations. Although the company has managed to secure the funding needed to restart the rehabilitation process, its path to recovery remains steep, if not bleak.

The court's decision came weeks after it had ordered the termination of the rehabilitation process on July 3. That decision reflected Homeplus' rapidly deteriorating financial condition. Its debts had continued to mount while sales revenue kept falling during the year since the company entered court-led rehabilitation. It also failed to secure the 200 billion won in DIP financing needed to inject fresh capital for essential operating expenses such as supplier payments, payroll and inventory replenishment.

On Tuesday, however, the court reversed its earlier ruling after Homeplus secured the emergency financing at the last minute.

The decision gives the retailer a brief reprieve. Homeplus now has until Sept. 4 to submit a credible rehabilitation plan outlining debt restructuring, repayment schedules and options for mergers and acquisitions or refinancing.

Even if only temporarily, the court's reversal is undoubtedly welcome news for Homeplus employees, workers at affiliated businesses and thousands of suppliers. Had the company been forced into bankruptcy, massive layoffs would have been inevitable, while the resulting shock to suppliers could have triggered a wave of secondary bankruptcies.

Still, Homeplus has merely bought itself two more months to prove that it remains a viable business. If it fails to present a convincing turnaround plan within that time, bankruptcy will likely be unavoidable. MBK Partners, Homeplus' largest shareholder, must recognize the urgency of the situation and present a realistic rehabilitation plan capable of restructuring the retailer's debt and restoring its operations.

The private equity firm has come under heavy criticism for its mismanagement of Homeplus. MBK acquired the retailer in 2015 for 7.2 trillion won, financing about 4.3 trillion won of the purchase through a leveraged buyout backed by Homeplus' own assets. The deal saddled the company with an enormous debt that has weighed on its finances ever since, forcing it to spend hundreds of billions of won annually on interest payments.

As a result, Homeplus lacked the financial capacity to invest in innovation or strengthen its competitiveness, leaving it increasingly vulnerable in the fierce competition with e-commerce platforms. Its debt-to-equity ratio has since ballooned to nearly 3,000 percent.

The company's financial health has worsened dramatically since it entered court-supervised rehabilitation in March last year. According to data released by Rep. Lee Hai-min of the minor Rebuilding Korea Party, Homeplus' daily sales averaged 23.8 billion won in March last year but plunged to just 5.3 billion won in May this year. The collapse in sales forced the retailer to shut down stores. Homeplus operated 126 stores nationwide in March last year, but that number has fallen to just 67 as of May this year. Those remaining stores have been temporarily closed since July 13.

The human cost of a Homeplus bankruptcy would be immense. According to the company's labor union, nearly 300,000 people could be affected, including employees, suppliers, tenants and workers whose livelihoods depend on the retailer. As the company's future hangs in the balance, many have taken to the streets in Seoul to plead for action.

The words of a tenant who joined the July 15 rally in Gwanghwamun should resonate far beyond the protest site:

"I am not here to strike. I am begging MBK Partners and the government to help and save us. We are desperate."