[Each Their Own JR REITs]③ Listed REITs’ Rehabilitation Exposes Management Limits and Systemic Gaps

Shareholders and Creditors Pursue Different Timelines
Asset Managers Respond Differently Even with Similar Properties
First Listed REIT Rehabilitation Highlights Systemic Gaps

Editor's NoteJR Global REIT, the first publicly listed REIT to apply for rehabilitation proceedings, has lost its case in a UK court, putting its 600 billion won debt restructuring plan to the test. The Asia Business Daily examines the remaining legal and financial issues from the UK ruling, the controversy surrounding the valuation of Finance Tower, the feasibility of the five-year repayment plan, and the institutional shortcomings revealed by this affair.

JR Global REIT (JR REIT) and the meeting of public bondholders are set to sit at the negotiating table. The debt restructuring talks, previously delayed while awaiting the UK litigation outcome, are now entering a full-scale phase. However, with differing preferences and timelines for normalization sought by the company, bondholders, and shareholders, smooth negotiations are unlikely.

According to the investment banking (IB) industry on September 14, the public bondholder group demanded on September 9, right after the UK verdict, that the company confirm the negotiation schedule, the attendees, and key agenda items. The company responded that same day, and both sides agreed to meet on the 15th. The court's previously mandated Autonomous Restructuring Support (ARS) negotiation period was set to end on that day.

The deadline for submitting the preliminary investigation report by Samil PwC, appointed as investigator by the Seoul Bankruptcy Court, is September 28. Since this is after the ARS deadline, there is talk of another potential extension of the negotiation period. The coalition of shareholders has scheduled a meeting with the current board on September 18 to share views on the situation and assess the company's normalization capabilities.

Negotiations to Exceed the Original ARS Deadline... Divergent Calculations Between Shareholders and Creditors

The public bondholder group has submitted its own proposal, in place of the company's five-year repayment plan, to sell assets and pursue refinancing by 2028, and to trigger an acceleration clause if such targets are not achieved. While creditors prioritize the timing and certainty of recovery, shareholders prefer more time if they expect asset values to recover. For creditors, a paid-in capital increase serves as repayment funding, but for existing shareholders, it means equity dilution.

Lee Jeongyeob, head of Law Office Rojipsa and former senior judge at the Seoul Bankruptcy Court, remarked, "Due to the diversity in rights, repayment priorities, and maturity dates, groups naturally form among parties with common interests," and added, "It's rare to see rehabilitation cases entangling tens of thousands of people, so reaching agreements is not easy."

To adjust the upcoming public bond maturity—set for October 14—and related terms, a general bondholders' meeting is required. Considering the necessary convening procedures, creditors believe a final ARS proposal must be in place by around September 21. The public bondholder group does not categorically oppose an additional extension, but if extended, it insists this must essentially be the final opportunity.

Kim Hyunwook, head of the JR Global REIT shareholder coalition, said, "Shareholders and management should not be regarded as the same. While there are differences in interests between shareholders and public bondholders, we want to discuss realistic solutions together." He added, "We need until the end of September to complete the preliminary investigation and review options for sourcing external funds."

Faced with Foreign Office Crises, Response Timing Made All the Difference

The JR REIT incident has also called into question the asset manager's crisis response capabilities. As the value of Finance Tower fell and the local loan-to-value (LTV) ratio increased, the company failed to secure sufficient capital or reduce debt before a cash trap was triggered. After maturities for FX hedge settlements overlapped, the company applied for rehabilitation proceedings—meaning it must now seek both new lenders and additional funding at the same time.

Kim criticized the company's proposed repayment plan, saying, "It is little more than an excuse and lacks sufficient preparation." He argued that "shareholders have for months inquired about the amount retained locally and the cash actually available for repayment, but as of the temporary shareholders’ meeting in August, there was still no clear answer."

With only Finance Tower and an office building in Manhattan, New York in its portfolio, JR REIT has limited options to turn to during crises. Now, having lost the UK lawsuit, JR Asset Investment Management must prove the viability of its normalization plan through actual refinancing and new funding procurement.

The response of KB Star REIT, which owns an office in the Brussels region leased long-term by a government entity, was markedly different. KB Star REIT raised about 105.4 billion won through a paid-in capital increase in April, repaid much of its debt, and lowered its debt ratio from 364% to 182%. While there is the difference that affiliates of KB Financial Group participated in the capital increase, the company gained time by securing capital domestically before a full-blown liquidity crisis hit. However, the refinancing of local senior loans remains an ongoing challenge.

First Rehabilitation for a Listed REIT... Institutional Gaps Raise Concerns

Institutional shortcomings remain an issue. The Real Estate Investment Company Act requires REITs to distribute at least 90% of distributable profits as dividends, and for externally managed REITs, the Corporate Tax Act also requires dividend payouts of at least 90% of distributable gains for tax exemption. These mechanisms protect investors, but in a rehabilitation scenario—where preserving cash is vital—they can come into conflict.

On September 1, two members of the JR REIT board submitted a proposal to the Ministry of Land, Infrastructure and Transport to temporarily suspend dividend obligations and penalties during the rehabilitation process, and to have amounts used for debt repayment recognized similarly to dividends for tax purposes. The shareholders' coalition submitted additional opinions and petitions not only to the Ministry but also to the Financial Supervisory Service and the Financial Services Commission. The proposal to the Ministry includes requests for the Financial Supervisory Service to share the inspection results on disclosure matters and for collaborative institutional review by the FSC and Ministry of Economy and Finance.

While REITs are regulated by the Real Estate Investment Company Act, following listing, they are also governed by capital market and exchange rules, and in rehabilitation, the Debtor Rehabilitation and Bankruptcy Act applies as well. How these institutions coordinate the failure of a listed REIT—entangling both individual shareholders and public bondholders—is now being tested for the first time in this case.

With the UK judgment removing uncertainty, the remaining task is to negotiate who will wait for how long, when the assets will be sold, and who will bear the related costs. The fate of JR REIT is expected to serve as the first case testing whether current regulations can effectively manage the failure of a publicly listed REIT with a wide pool of retail investors.

This content was produced with the assistance of AI translation services.