SOUTH KOREA Law and Practice Contributed by: Ie Hwan Yoo, Hang Jin Chang and Da Eun Jung, Kim & Chang
4.2 Bank/Bond Deals When a corporate purchaser issues bonds, they are unsecured corporate bonds and the bond investors do not receive any security. Therefore, bond investors are rarely a party to an intercredi- tor agreement. 4.3 Role of Hedge Counterparties It is very rare for a hedge counterparty to be a creditor in a Korean acquisition-financing trans- action. Therefore, hedge counterparties are rare- ly a party to an intercreditor agreement. 5. Security 5.1 Types of Security Commonly Used A general charge or assignment over all assets of a party is not acknowledged in Korea. There- fore, a separate security interest should be cre- ated in relation to each type of asset. The main types of security interest are as follows. Statutory Mortgage This is a statutory form of security interest. Since mortgages provide secured creditors with pri- ority over subsequent creditors and purchasers of the relevant property, mortgages are gener- ally preferred by creditors. Mortgages can only be created over registrable property, which are types of property that require title to be regis- tered with appropriate judicial and governmental authorities (such as real property, aircraft, auto- mobiles, and certain categories of ships and heavy equipment – but not intellectual property rights). The most common form of mortgage is a kun- mortgage used for establishing security interests in real property. A kun-mortgage requires only that a maximum secured amount be specified when recording the kun-mortgage with the court
(SPV) for the acquisition, and will inject capital and raise debt from third-party lenders through that vehicle to fund the acquisition. The SPV will have no assets to provide as security to the lend- ers other than the shares of the target company that it intends to acquire. As further discussed in 5. Security , assets of the target company cannot be provided as security because of a potential breach of fiduciary duty by the target company’s directors under Korean law. However, corporate purchasers that do not utilise a separate SPV, or purchasers that directly acquire certain assets or businesses of a target company (rather than acquiring the shares of the target company), may choose to provide their own assets or the acquired assets to secure the debt that they raise for the acquisition. The contents of the intercreditor agreement used in the Korean acquisition finance market do not differ materially from those governed by the laws of England and Wales or the State of New York, though the forms are relatively simpler. The usual arrangement in Korea is to first pay off the senior loan in full before payment of the mezzanine loan. Most commonly, the interest on the senior loan is paid in cash on a quarterly basis. In the case of a mezzanine loan, a recent market trend is for: • the interest at a lower coupon rate to be paid in cash on a quarterly basis; and • the yield to maturity accrued on a compound basis to be paid on the final maturity date. 4. Intercreditor Agreements 4.1 Typical Elements
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