Moody's Investors Service says that the announcement on 24 December by Woori Finance Holdings Co., Ltd. (WFH, unrated) that NongHyup Financial Group Inc. (NH FG, unrated) is the preferred bidder to acquire Woori Investment & Securities Co Ltd (WIS, unrated), is credit negative for both NongHyup Bank (NH Bank, Baa2/P-2 negative) and WIS. As such, Moody's said it will examine the impact of the proposed acquisition on the credit profiles of both companies.
NH FG is the parent of NH Bank. NH FG, in turn, is owned by Korea's National Agricultural Cooperative Federation (NACF), a non-profit federation of agricultural cooperatives. The sale of WIS is part of the government's privatization plan for WFH, which owns WIS.
This conclusion is based on Moody's assessment that NH Bank, as the principal operating entity and main profit contributor in NH FG, will likely bear the bulk of the cost of the potential acquisition, for which NH FG made a bid of KRW 1.15 trillion for WIS package deal. The asset size of WIS amounted to around 14% of NH Bank at end-June 2013.
Specifically, Moody's expects the acquisition to raise NH FG's double leverage. It estimates that, in a scenario where NH FG finances the acquisition entirely with debt, its double leverage ratio would rise to 115% from 109% at end-Oct 2013. This will constrain NH FG's capacity to support NH Bank. In 2013, NH FG made a capital injection of KRW950 billion capital to NH Bank to enable the latter to maintain a Tier 1 capital ratio of above 12% at end-2013.
Moody's also highlights potential execution risks as it sees NH FG's lack of experience in the securities industry as a threat to its management of WIS. This is despite the recognition that the acquisition will strengthen NH FG's market share in the securities industry and generate additional revenue sources for NH FG. Currently, NH FG, through its brokerage subsidiary, NH Investment & Securities, has a market share of 1.3% of the brokerage market, compared with 8.5% for WIS.
Moody's also cited NH Bank's existing profitability and capital constraints as key credit concerns. The acquisition may worsen its credit profile given the potential increase in debt burden.
Currently, NH Bank has the obligation to pay the NACF, its ultimate parent, an annual brand fee at around 2.0% of its three-year average gross operating revenue.
Aside from this fee obligation, Moody's is also aware of the risk that the financial burden that comes with the acquisition will further undermine NH Bank's already weak position to retain earnings. NH Bank has been making high dividend payments to NH FG to help the latter cover the legacy reorganization expenses of its parent, the NACF.
Moody's also sees the proposed acquisition as implying a potential weakening in the parental support WIS could receive. This adds to its existing view that WIS is already facing earnings pressure and volatility from the difficult operating environment in Korea -- a view that is currently reflected in its negative outlook for WIS' rating.
Furthermore, Moody's current rating on WIS incorporates two notches of uplift based on parental support from WFH, an assumption that Moody's contends could be at risk after the proposed acquisition.
Source: Moody's
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