[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 REITs, the first listed REIT to apply for rehabilitation proceedings, also lost its lawsuit in the UK, placing the direction of debt restructuring, amounting to over 600 billion won, at a major turning point. The Asia Business Daily reviews the key issues left by the UK judgment, the controversy over the valuation of the Finance Tower, the feasibility of the five-year repayment plan, and examines the institutional loopholes this crisis has exposed.

JR Global REITs (JR REITs) and the public corporate bondholders’ group are now coming to the negotiating table. Debt restructuring talks, previously postponed while awaiting the outcome of the UK lawsuit, are now resuming in earnest. However, because the company, creditors, and shareholders each have different approaches and timetables for normalization, the negotiations are not expected to proceed smoothly.

According to the investment banking (IB) industry on September 14, the public corporate bondholders’ group requested on September 9, immediately after the UK ruling, that the company confirm the negotiation schedule, participants, and main discussion points. The company replied on the same day, and both parties agreed to meet on September 15. Originally, the court-allowed period for Autonomous Restructuring Support (ARS) negotiations was until this date.

The Seoul Bankruptcy Court’s designated investigator, Samil PricewaterhouseCoopers, is required to submit a pre-commencement report by September 28. Since this deadline is later than the ARS period, there is speculation that the negotiation period could be extended once more. The shareholders’ alliance plans to meet with the existing board of directors on September 18 to address the situation and assess their capacity to lead normalization efforts.

Negotiations Continue Beyond Original ARS Deadline... Different Calculations Between Shareholders and Creditors

The public corporate bondholders’ group has proposed its own plan, rejecting the company’s five-year repayment scheme. Instead, they call for asset sales and refinancing by 2028, and if that is not achieved, they demand acceleration (loss of the benefit of the term). Creditors prioritize the timing and certainty of recovery, whereas shareholders prefer to secure more time if they believe asset values may recover. Paid-in capital increases serve as sources of repayment for creditors, but for existing shareholders, they mean equity dilution.

Lee Jungyeop, head of Law Office Rojipsa and a former chief judge at the Seoul Bankruptcy Court, said, “Because rights relationships, repayment hierarchy, and maturity dates all differ, stakeholders with aligned interests tend to group together. With tens of thousands of parties involved, such rehabilitation cases are rare and achieving consensus is difficult.”

To adjust the maturity and interest rate of the next public corporate bond, which matures on October 14, a bondholders’ meeting must be convened. Considering the procedures, it is the creditors’ view that a final ARS plan must be in place by around September 21. The public corporate bondholders’ group does not oppose further extensions unconditionally, but insists that if there is another extension, it should be the final one.

Kim Hyunwook, representative of the JR Global REITs Shareholders’ Alliance, stated, “Shareholders and management should not be equated. While there are differences in interests compared to the public corporate bondholders, I would like to discuss realistic solutions together. We also need time until the end of September to review the pre-commencement investigation and possible external funding.”

Although Both Faced Overseas Office Crises... Timing of Response Made the Difference

The JR REITs crisis has also spotlighted the management company's crisis response capabilities. The value of the Finance Tower fell, increasing the local loan’s loan-to-value (LTV) ratio, but the company failed to raise enough capital or reduce debt before the cash trap materialized. When the maturity date for currency hedging settlements arrived, the company finally applied for rehabilitation proceedings, and now must secure both new lenders and fresh funds at the same time.

Kim added regarding the company’s proposed repayment plan, “It’s more of an excuse than a prepared plan. Shareholders had been asking about the amount set aside locally, as well as the amount of cash actually available for repayment, for several months, but did not receive clear answers even by the August extraordinary general meeting.”

With only two assets—Finance Tower and an office in Manhattan, USA—the options to respond in a crisis are limited. Now that the UK lawsuit has also failed, JR Asset Management must prove the feasibility of its normalization plan through actual refinancing and the ability to raise new funds.

In contrast, KB Star REITs, which holds an office in the Brussels area leased long-term by a government agency, responded differently. In April, KB Star REITs raised about 105.4 billion won through a paid-in capital increase, repaid its debt, and reduced its debt ratio from 364% to 182%. While KB Financial Group affiliates participated in the capital increase—a notable difference—they managed to secure capital domestically before the liquidity crisis intensified, buying time. However, refinancing the local senior loan remains an outstanding task.

First Rehabilitation Filing for a Listed REIT... 'Institutional Vacuum' Also an Issue

Institutional loopholes are another challenge. The Real Estate Investment Company Act requires REITs to distribute at least 90% of their distributable income as dividends, and under the Corporate Tax Act, management-type REITs must also distribute at least 90% to qualify for tax deductions. These are mechanisms to return profits to investors, but in a rehabilitation situation where companies must preserve cash, conflicts may arise.

On September 1, two directors of JR REITs submitted a reform proposal to the Ministry of Land, Infrastructure, and Transport, requesting a suspension of dividend requirements and penalties during rehabilitation proceedings, and for amounts used to pay creditors to be treated similarly to dividends for tax purposes. The shareholders’ alliance also submitted their opinions and petitions to the Financial Supervisory Service and the Financial Services Commission, in addition to the Ministry of Land. The proposal also asked for updates on the status of disclosure-related inspections by the FSS and a joint review of institutional reforms by the FSC and the Ministry of Economy and Finance.

REITs are governed by the Real Estate Investment Company Act, but after public listing, capital market and exchange regulations apply, and in rehabilitation, the Debtor Rehabilitation Act also comes into force. This is the first time these frameworks are being tested on the default of a listed REIT involving numerous individual shareholders and public bondholders, to see how effectively they can coordinate.

With the UK ruling resolving the uncertainty, the remaining issue is negotiations over who will wait and for how long, when to sell assets, and who will shoulder the associated costs. The fate of JR REITs is set to become the first test case of whether the current system can truly coordinate the default of a listed REIT entangling numerous individual investors.

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