SOUTH KOREA Trends and Developments Contributed by: Yun Seok Jang, Yong Hee Kim, Gajin Choi, Dae Kun Jang and Seung Hyun Dennis Cho, Shin & Kim
and the acquirer of the target. Upon consum- mation of the acquisition, the target will become the subsidiary of the borrower. The acquisition loan is usually repaid in one lump sum at matu- rity. The term of the acquisition loan is usually between two and five years. If the borrower elects to prepay the loan, a prepayment fee will usually apply if the loan is prepaid between 12 and 18 months from the drawdown. In terms of security, an acquisition facility is generally secured by the target’s shares and the borrower’s bank accounts. The target assets may not be used as collateral to secure the acquisition loan due to breach of fiduciary duty concerns discussed in more detail below. For the same reason, the target may not provide a guarantee to support the payment obligation of the borrower, as such guarantee will constitute an upstream guarantee. The acquisition loan agreement in Korea typi- cally contains a robust set of representations and warranties and covenants. The most com- mon financial covenants required by the lenders cover the ratio of net debt to EBITDA and the ratio of loan to value of the shares provided as a security (generally in respect of publicly traded target companies). Lenders may consider a covenant-lite documen- tation, if the financing is provided for an acqui- sition of a minority equity interest in a target. In case of an acquisition of a minority interest in a listed company, the lenders may forego strin- gent documentation terms in place of a strict loan to value test (ratio of loan to value of the listed shares granted as a security). Carve-Out Structure In 2024, carve-out transactions emerged as a new trend. Amid high interest rates and uncer-
tain macroeconomic conditions, major Korean conglomerates pursued strategies to concen- trate on core businesses and divest non-core assets. PEFs have been actively participating as sponsors in these carve-out deals, leading to an expansion in overall acquisition financing demand. This strategic shift reflects a broader trend where large corporations are opting to sell non-core companies, while PEFs are increasingly inter- ested in acquiring such assets. This dynamic is anticipated to drive growth in the M&A market and related financing activities in the coming years. Some of the recent notable transactions include the sale of SK Enpulse’s ceramic busi- ness, the sale of SK Pucore and the sale of LG Chem’s diagnosis business. Acquisition financing for carve-out transactions often exhibits distinct characteristics compared to traditional buyout deals. Structure typically involves the PEF establishing a new entity and acquiring the business through an asset transfer. In such arrangements, the PEF or its special pur- pose company (SPC) incurs debt financing for the acquisition and contributes them as equity investment to the newly formed entity. The PEF or SPC often pledges the shares of the newly established company as collateral for the loan. Additional capital infusion after the carve-out transaction is completed is frequently consid- ered by PEFs as follow-on investment. To facili- tate this, specific conditions are often negotiated with the lenders group and are incorporated into the finance documents. These conditions may include placing covenants on cumulative invest- ment amounts or restricting that investments can only be permitted if agreed-upon financial ratios are complied with. Such approach aligns with customary practices in carve-out financing,
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