SOUTH KOREA Law and Practice Contributed by: Ie Hwan Yoo, Hang Jin Chang and Da Eun Jung, Kim & Chang
3.3 Bridge Loans Bridge loans are often used for the acquisition of shares in a listed target. For a public tender offer, the offeror must submit documents evidencing that it has the funds available to complete the tender offer (such as a certificate of deposit bal- ance or a commitment letter issued by a domes- tic financial institution) to the FSC at the time of filing the tender offer statement. Bridge loans (secured by a pledge over the account on which the loan is funded) are often used to finance the transaction. If the tender offer is successful, the bridge loan is paid from the proceeds of the main debt financing and equity investments. Con- versely, if the tender offer is unsuccessful, the bridge loan is simply repaid from the proceeds deposited in the pledged account. A bridge loan is usually provided by one lender, for the follow- ing reasons: • confidentiality is a crucial factor in these types of transactions; and • the offeror generally prefers to deal only with one lender. 3.4 Bonds/High-Yield Bonds Corporate purchasers have mostly financed their acquisitions by issuing bonds or bank loans, but otherwise a secondary market for subordinated bond/high-yield debt is not active in Korea. 3.5 Private Placements/Loan Notes When corporate purchasers finance their acqui- sitions by issuing bonds, this takes the form of private placement, as opposed to public offer- ing. In the Korean acquisition financing market, there is no such legal form as loan notes. 3.6 Asset-Based Financing Typically, for a share deal where the purchaser acquires the shares in a target company, the purchaser will set up a special purpose vehicle
Senior loans usually consist of one or more term-loan facilities and a revolving facility. The purpose of the term-loan facilities is to pay the acquisition cost together with the equity invest- ment amount, and the purpose of the revolving facility is usually to pay the financing cost and other working capital requirements. The bullet repayment of the senior loans on the final repayment date is most common. The term of the senior loans is usually four to five years. A prepayment fee is usually charged on the volun- tary prepayment of the term-loan facility within 12 to 18 months from the closing date. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans Mezzanine loans are usually term-loan facilities for paying a portion of the acquisition cost. As previously discussed, since the investors par- ticipating in the senior loans and mezzanine loans are usually the same or a similar group of financial institutions, the length of the mezzanine loan may often be the same as the senior loan, with the same security package given to the sen- ior lenders provided in favour of the mezzanine lenders. Furthermore, the documentation for mezzanine loans is often similar to those for senior loans (although certain financial covenants or events of default are more lenient than for senior loans). Also, the upfront fee, interest rates and prepay- ment charges are usually higher for the mezza- nine loans than those for senior loans. Payment-in-kind (PIK) interest for mezzanine loans is quite common in the Korean acquisi- tion finance market.
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