honestbee chairman Brian Koo looms large in startup's revamp bid

Singapore

AS HONESTBEE seeks court protection to restructure some US$209 million worth of debt, questions remain about whether its key backer and chairman Brian Koo holds all the cards, or if minority creditors will have more of a say in the outcome.

The grocery delivery startup had taken US$4 million in loans from two funds under Mr Koo's venture firm Formation Group this year that were secured by charges over all of honestbee's assets.

While the sum is small relative to honestbee's total liabilities, the loan makes the Formation Group funds honestbee's only secured creditors, with seniority over all of the startup's other financial and trade creditors.

Even among unsecured creditors, Mr Koo, a scion of the LG empire, appears dominant. The company is understood to owe S$185 million to A Honestbee, a vehicle in which Mr Koo's family business Yesco is a major shareholder; S$24.6 million to Mr Koo himself and S$34.9 million to F8 Asia Growth, also linked to Mr Koo. This adds up to about 88 per cent of honestbee's unsecured debt, understood to stand at about US$205 million.

Those numbers can give the impression that there is little left to negotiate. Two unsecured trade creditors who spoke to The Business Times expressed resignation that there is little they can do at this point, except to watch how the court proceedings play out.

It would appear that honestbee cannot restructure its debt without support from the Koo entities.

Support has already been given by A Honestbee, Formation Group, F8 Asia Growth and Mr Koo, along with eight other unsecured creditors, BT understands. Those creditors are backing plans described by honestbee chief executive Ong Lay Ann as a full debt-to-equity swap that would see even small trade creditors receiving shares of the startup in lieu of repayment.

honestbee has not provided further details about the proposed scheme of arrangement, and is currently seeking a six-month debt moratorium from the High Court.

In response to queries from BT, Mr Koo declined to comment on his plans for honestbee, citing the ongoing court proceedings.

On why other creditors should support the restructuring, he said: "Given the current financial situation, the scheme of arrangement is the most sensible and fairest solution for all creditors."

But what Mr Koo and the supporting creditors want may not align with some other minority creditors. Would an honestbee supplier, for example, want to be an honestbee shareholder, or would it prefer some other restructuring alternative like extending the maturity of the debt, or even liquidation?

As it stands, at least three creditors have already told the Court that they oppose a debt moratorium: financial creditor Benjamin Lim Jia-Rong, owed US$3.8 million; trade creditor MOS Foods Singapore, owed over S$63,700; and landlord LHN Space Resources, owed over S$91,500.

LHN Space Resources also filed a carve-out application, where in the event that honestbee secures a moratorium, the landlord wants to be able to enforce its right to reenter 34 Boon Leat Terrace, which houses the startup's habitat supermarket.

What's a dissenting creditor to do?

Singapore's restructuring rules require that schemes of arrangement be approved by at least a majority, in number, of creditors in each class who represent at least 75 per cent of the debt value within the class.

This may mean that although Mr Koo and his related entities hold enough of honestbee's debt to cross the value hurdle, they might still require support from more creditors to obtain a majority by number. Unless a "cram-down" mechanism is specifically invoked and granted, this might be the best way for minority creditors to block schemes they do not want.

Whether Mr Koo and his affiliates will have an outsized influence in the voting process may also depend on how exactly the creditors are divided into the various classes.

Justin Chia, head of restructuring and insolvency at Eversheds Harry Elias, noted that in such proceedings, broadly speaking, unsecured creditors' interests may be better represented if they come together. "This may help the company to better understand their concerns, and to consider if the terms of the proposed restructuring plan may be adjusted to take into account such concerns," he said.

But even if dissenting minority creditors can potentially band together to block a proposal, a blocked scheme is still a long way from getting an alternative plan approved. Without an agreement, honestbee might be forced to undergo judicial management or liquidation, explained Koh Kia Jeng, a senior partner at Dentons Rodyk.

A liquidation scenario might be worse for minority creditors, because it is not clear what might be left after Formation collects on its senior US$4 million secured claim.

According to regulatory filings, honestbee had US$10.8 million in assets as of end-2015, including US$6.4 million in cash, US$2.2 million in property and equipment and a house in Hokkaido, Japan worth US$1.29 million. Much of honestbee's assets, especially cash, may have been depleted. In 2015 alone, honestbee burnt through US$6.78 million in cash. honestbee has not provided an update on its financials.

"If honestbee's assets are insufficient to satisfy the debts of such creditors ranking above the unsecured creditors, the unsecured creditors are not likely to be able to recover anything at all," Mr Chia explained.

Given the circumstances, dissenting minority creditors' best hope may lie in Mr Koo wanting to avoid liquidation even more than they do.