[News Focus] FSC pressed to settle Lone Star issue

Regulator likely to face criticism whether or not it supports own decision


The market is focusing on the issue of whether financial regulators will endorse Hana Financial Group’s plan to acquire Korea Exchange Bank from Lone Star Funds in the coming weeks.

The issue is gaining more interest after the Financial Services Commission declined to make a clear ruling on whether Lone Star has been eligible to control Korea Exchange Bank as the dominant shareholder.

But the possibility that the FSC will make a final ruling on the fund’s eligibility in the near future is low as either conclusion ― “was eligible” or “was ineligible” ― could face and severe criticism from the public either way.

It was the FSC that approved Lone Star’s acquisition of KEB in 2003, which has been the Achilles’ tendon for the financial authorities.

As the public has witnessed a series of protests among KEB unionized workers and Lone Star’s reaping huge gains after trading properties in Korea, more and more Koreans have been informed of the dubious process under which several government officials decided to sell the bank to the U.S. fund eight years ago.

A group of lawmakers and civic groups continued to claim that there was little serious problem in the bank’s financial soundness.

Now even an FSC official said it seems that “few FSC staffers believe Love Star is a financial investor” which could be entitled to own a local commercial bank.

An official of the Financial Supervisory Service also said, “It is quite simple. Lone Star is just a fund (a non-financial investor which is banned from controlling a financial service company in Korea).”

There is a high possibility that the authorities will maintain the ambiguous stance on the fund’s eligibility not to fall into self-contradiction in eight years.

Though the FSC said last week it believes that Lone Star is not a non-financial investor, the regulator did not rule that the fund is a financial investor.

It added that an additional review of whether the fund satisfies the full requirement to become the majority shareholder of KEB would be needed.

Korean law bans industrial capital from taking more than 9 percent of a bank. A firm is categorized as industrial capital when its non-financial assets exceed 2 trillion won ($1.75 billion) or its holdings of non-financial concerns account for at least 25 percent of its total equity capital.

Many analysts at home and abroad ― despite the ambiguous stance of the FSC toward the shareholder eligibility of the U.S. fund ― predict that the regulator will eventually approve the takeover deal.

In effect Lone Star’s eligibility or ineligibility does not affect Hana-KEB acquisition deal, many of the analysts believe.

Even if the FSC rules that the fund was ineligible to buy more than 50 percent stake in KEB, the following process is merely that Lone Star will be ordered to sell off most of its shares on the stock market.

The fund could choose to hand over the dominant shares to Hana Financial under their bilateral preliminary deal signed last November.

Furthermore, the FSC’s ongoing review on Hana-KEB takeover deal since last December could be irrelevant with Lone Star’s eligibility.

The task of the regulator is to rule whether Hana is eligible to control KEB. And there is no doubt that Hana is a financial investor as the nation’s fourth-largest financial group.

Hana Financial may have to pay penalties totaling 32.9 billion won a month to Lone Star if it fails to obtain the regulatory approval by the end of March.

Some analysts say the FSC stands at a crossroads.

“There are two ways ― either correcting its past fault or endorsing the takeover deal leaving Lone Star’s shareholder issue still unsettled,” an analyst said.

Meanwhile, the labor union of KEB is mulling an all-out struggle, including a general strike, to block Hana Financial Group from acquiring the commercial bank.

By Kim Yon-se (kys@heraldcorp.com)