South Korea’s private equity (PE) firm Hahn & Company’s third recapitalization of its portfolio company Ssangyong Cement Industry is going smoothly.

Mirae Asset Daewoo, a lead arranger of the recapitalization, received letter of intent (LOI) from financial institutions including insurance companies and capital firms on March 10, according to investment banking (IB) industry sources. According to the results, the amount of investment from financial institutions seemingly amounts to about 1.6 times the size of the recapitalization.

“Hahn & Co. successfully attracted investors for its previous two rounds of recapitalization of Ssangyong Cement and the similar mood is being formed for the latest recapitalization as well,” said an IB industry source. The PE firm’s previous two rounds of recapitalization on the company were reportedly 150 percent overbooked.

There have been concerns about the latest recapitalization as the PE firm uses the proceeds to repay the existing debt for the acquisition prior to maturity, which heightens uncertainties over its asset management. Some have pointed out that the recapitalization works only in favor of equity investors with the PE firm conducting a series of recapitalization for the purpose of dividend payment.

Ssangyong Cement’s stock movement is also one of uncertainties. With its recent stock price trending down, many view that Ssangyong Cement has excessive level of debt compared to its equity value. The acquisition financing market generally allows loan-to-value (LTV) ratio of around 50 percent when using stock-collateralized loans. The latest recapitalization amount is said to be around 1.5 trillion won, which means the company has to have an equity value of approximately three trillion won.

Ssangyong Cement stocks closed at 5030 won on March 9. The stock price has been showing downtrend from 6000~7000 won since its stock split in July 2018. After taking into the account the recent stock price movement, Ssangyong Cement’s market capitalization amounts to approximately 2.6 trillion won, which is around 400 billion won short to conduct 1.5 trillion won worth recapitalization.

On the other hand, Ssangyong Cement’s biggest strength is its ability to generate stable cash flow. The company recorded EBITDA of around 393 billion won in 2019. In 2016 when Hahn & Co. acquired the company, it recorded EBITDA of 357.5 billion won, up around 50 billion won from the previous year. The company’s EBITDA has been increasing continuously and market watchers estimate its EBITDA to exceed 400 billion won this year.

Hahn & Co. financed 780 billion won through acquisition financing when taking over Ssangyong Cement in April 2016. In January 2018, the buyout firm secured around 1.05 trillion won in the first recapitalization on the cement manufacturer. In February 2019, the buyout firm secured 1.3 trillion won in the second refinancing on the company. The PE firm’s latest round of recapitalization is expected to increase around 200 billion won in size compared to the previous round. The deal is expected to close at the end of March. (By reporter Kim Byung-yoon)