Since early 2018, media coverage of the U.S. and China trade war and political differences dominated discussions regarding international investment and Asian mergers and acquisitions, or M&A. Headline news on court proceedings covering constitutional law, international treaties, intellectual property, national security, and breaches of multiple critical legal subjects became the yeast for streaming and paper content. We decided it was time to share about what is happening positively in Asian M&A. This article attempts to educate, at a high level, Korean (South Korean) companies’ approaches to investment and financing in the U.S. energy industry. For several decades, we have covered and continue to represent Korean companies in the U.S. Over the past several years, much has changed. Not only did financing activity grow, but their transactional strategy developed to combine traditional Korean business culture and thinking with market knowledge for a disciplined approach in risk analysis and a deep dive into due diligence, negotiations, and contract structures.
Business people and lawyers in international commercial transactions can learn a great deal from examining the relatively short, yet very vivid, history of Korean participation in the U.S. energy industry.
The Good News—No Hacking or National Security Problems
Until recently, the concept of seeking Korean debt for financing energy projects in the U.S. would have been quite, well, “foreign.” Raise the idea with project owners or developers and you were likely to encounter frowns and responses along the lines of, “I have heard they are very slow, cautious, and difficult to commit.”
True, this was often the case. Lack of familiarity with U.S. energy markets and business cultures, which are vastly different from Korea, made it difficult for Korean financial investors to become comfortable with commercial and legal risks. They tended to seize upon issues they understood but ultimately were not important and did not materially impact the overall project, to the frustration of Americans. Korean banks were not known as global institutions and generally for good reasons. That was then, this is now.
Working with trusted advisers that understood the U.S. energy markets and could help them through the deal process, Korean financial institutions quickly learned to speed up their review process to compete with American, European, and Japanese lenders. Here are samples of the significant transactions that shaped the current trend:
• 2016—Hana Financial Investment became the first Korean institution to act as a lead arranger and underwriter for a significant natural gas-fired power plant located in Lackawanna, Pennsylvania. Hana committed $200 million in direct loans as part of the $1 billion debt financing of the Lackawanna Energy Center. This kicked off a wave of investment in gas-fired power projects in the U.S. northeast power regional market, known as PJM, which covers approximately 13 states including Pennsylvania, New Jersey, and Maryland.
• 2016 and 2017—A surge of financing for green-field projects and refinancing of operating assets by Korean lenders helped project owners reduce borrowing costs. For example, NH Investment & Securities, National Credit Union Foundation of Korea, and Shinhan Capital committed $250 million in late 2016 to refinance the Newark Energy Center, an operating power plant.
• Late 2017—the largest commitment by South Korean investors occurred when NH Financial Group and Hana Financial Investment provided $400 million in senior debt, $20 million in mezzanine debt, and $20 million in equity to the green-field Panda Mattawoman Power Project in Maryland.
By early 2018, however, it became clear the PJM power region was headed for a potential overbuild, and Korean investors began looking for other places to place financial capital.
The preferred segment for investment became midstream. Korean financing was already present in U.S. liquefied natural gas, or LNG, projects where Korean companies bought supply under long-term contracts (Sabine Pass and Freeport LNG). However, in 2018, the investment became “de-coupled” and did not necessarily follow a strategic purchase or sale when Hana Financial Investment and Mirae Asset Daewoo provided $300 million to several projects backed by Ares Management. Heading into 2019, more transactions closed with Korean participation, such as the Blue Racer Midstream and the EPIC Crude Oil Pipeline.
Deep Dive Due Diligence With Trusted Advisers
The U.S. energy market and legal system plus regulatory frame-work are diverse and complex. Even Americans have to be super-humans to keep up with the industry players—who is doing what with whom. Therefore, for Korean companies, the due diligence review process has become far more broad and extensive than what American and European lenders might undertake. Korean investors and lenders need to learn everything about the assets and the markets they function in as well as the project participants. Checking the reputations and track records of the asset owners, developers, and partners in the deal is crucial. Old-fashioned truth and veracity have come back into vogue. The trusted adviser’s role in these transactions is broader and deeper and involves educating the client about the market, helping to ask the right questions, making sure the explanations/answers provided by counterparts and other deal participants reflect true industry practice, and explaining how the business works. Of course, the conventional due diligence will cover technical, financial, commercial, and legal review of the documents provided by the other side’s virtual data room, aka VDR, a secured online folder of everything the Korean consortium needs to know about the seller or sponsors of the project (contracts, financials, permits/licenses, environmental studies, regulatory compliance, market studies). Advisers—legal and commercial—are asked to review asset performance, prepare market studies, facilitate site visits, investigate the companies and management teams involved (any history of problems—personal and pro-fessional), and look at the legal and regulatory issues around licenses, permits, agreements, and models.
An American lawyer voiced his view that “trust is elusive.” Being Americans, we get that. However, that is not the case in Korean business and corporate culture. A Korean company will operate and work together in a tight team where members will ask questions and receive and rely upon complete non-judgmental answers, as they must be in a position to explain the situation to their organization’s senior (and mostly Korean speaking) chain of command. Our American culture’s customary approach to closing a transaction is to hire counsel; rush into the data room and pore over reams of files containing contracts, agreements, and corpo-rate and project documents; conduct conference calls; and negotiate the deal while doing due diligence. Ironically, the reality is that when a dispute arises and litigation begins, the focus (overly simplified) becomes making sure we can prove the client is “good” and the other side is “bad.” Getting to that stage of disputes/conflicts is exactly what the new approach to due diligence is designed to avoid. Korean investors and lenders have come to appreciate the value of knowing everything up front, including the ugly truths. Bottom line, Korean companies need and want to know about the background, reality, and facts behind the pitch before negotiations and kicking off the legal due diligence. In other words, it is 360-degree due diligence of all qualitative elements (people, management, business success/failures) and quantitative issues (markets, economics, financials, contracts, permits/licenses) in the deal or project structure. Applying this approach and method, Korean institutions are able to meet the American parties’ schedule and internal tight timelines by lean-ing heavily on an adviser they trust—one team with a cross section of experts governing the full range of risks and data—and reducing the risk of negative outcomes on a deal that perhaps is “pre-determined” to close, or should never have happened.
Korean companies are increasingly becoming ideal partners for American companies, particularly as a fusion of institutional equity and debt for projects. Helping the deal teams work through and truly understand the market, legal/regulatory, and commercial issues so they can explain to management or credit committees at headquarters means they are much better partners for American companies for the long run.
(As published in the Texas Bar Journal at https://www.texasbar.com/AM/Template.cfm?Section=articles&Template=/CM/HTMLDisplay.cfm&ContentID=48022)