A presentation to:

1. 24 March 2004 A presentation to: The World Bank Corporate Restructuring Fund: The Korean Case Christopher Vale Chief Investment Officer – Asia Rexiter Capital Management

2. Rexiter Capital Management

3. Introduction to Rexiter Capital Management • Rexiter is a Global Emerging Markets Fund Manager with funds under management of approximately USD1bn founded in 1997 • Rexiter is owned 25% by its employees and 75% by State Street Global Alliance LLC, a joint venture between State Street and ABP (largest Dutch Pension Fund) • Headquartered in London, Rexiter also have an office in Korea staffed by two senior fund managers and three Korean analysts seconded from its local sub-adviser (Hansset)

4. Government Objectives: Corporate Sector Reform In 1998 crisis led the Korean Government to… • Encourage SMEs • Dismantle Chaebols • Improve corporate governance • Improve balance sheets

5. Opening up of Korea - Foreign Investment Ceilings

6. Korea - Weight In MSCI AC Far East Free ex-Japan Index Korea first entered the MSCI regional indices at the end of January 1992, at 20% of market capitalisation. At the end of September 1996, the inclusion factor was raised to 50% of market cap, at the end of August 1998, to 100% MSCI ACFEFJ 1/92 12/95 11/99 % Korea 5.1 4.5 25.1

7. Background to the Korean Corporate Restructuring Funds (CRFs) • One of the policy initiatives taken by the Korean Government to counter the economic crisis that befell Korea in 1997/1998 • The CRFs consisted of four funds totalling USD1.3bn. State Street, Templeton and Scudder received USD250m each in balanced mandates. Rothchild Inc. received USD500m in a debt mandate • The funds were provided by 23 Korean Financial Institutions co-ordinated by the Government owned Korea Development Bank • The CRFs were targeted at small and medium sized Korean companies • Money received on 1st November 1998

8. Investment Guidelines of the Korean CRFs (1) • Must invest in newly issued debt or equity thus private equity in nature • Should focus on: • technology • exporters • venture companies • work-outs (subsequent request by MOF)

9. Investment Guidelines for the Korean CRFs (2) • Investment prohibited in the following : • Five largest business groups (Chaebol) • Government owned institutions eg Kepco and Posco • Property, Finance and Insurance companies • No more than 50% of the funds in 6th – 30th Chaebol

10. Portfolio Characteristics of the Korean CRFs • 10% maximum in a single company (I.e. $25m maximum investment size) • 25% maximum in any 6th – 30th chaebol • 25% maximum in any sector • Minimum number of investments 25 (ie average maximum investment $10m) • Maximum ownership 49% of any company (ie minority positions only) • Minimum investment debt or equity 30% • Unlisted investments had to be between 5% and 30%

11. Cost Analysis for the CRFs • Management Fee • Performance Fee • Must employ local advisory firm • Must maintain office in Korea • Must invest 50% by April 1999 (within five months) • Must invest 80% by July 1999 (ie within nine months) • Initial two year contract

12. Structure of Arirang CRFs • Mutual Funds – in theory had to list within 12 months • Reported to a Board of Directors, chaired by Korea Development Bank • Custodian and Administrator: KDB (and subsequently A Brain) • Manager: State Street • Sub-Adviser: Hansset Global Advisers

13. Arirang Restructuring Fund - Investment Process • Introduced to Potential Investee Companies • Screen 300+ companies • SSgA visit 100+ companies • Sign Letter of Intent and Confidentiality • Establish financial projections and verify assumptions used • See customers of potential investee companies • Sign Term Sheet • Propose Investment to Investment Committee • Negotiate Final Terms and Contract

14. Review of Arirang Corporate Restructuring Fund • Made 40 investments, 16 unlisted, 6 IPO’s • 2 major work-outs, 10 Venture, 13 Kosdaq, 11 KSE • Made capital distributions every June totalling KRW 220bn (approx $190mn ) • Fund currently worth KRW 173bn (approx $147mn) • All listed investments to be sold and distributed to shareholders by Sept 04.

15. Arirang Characteristics As at December 3, 1999

16. Korean CRF’s - Positives • Provided much needed capital quickly to many smaller companies when: • Banks couldn’t lend • Equity Market was too low for rights issue • Policy goals met in terms of economic recovery, maintaining employment. • Improved balance sheets • Improved corporate governance – investments usually incorporated: • Veto on debt/equity issuance • Veto on Capex • Board seats • Tag-along rights • Monthly reports • Improved investor relations (IPOs at higher prices in Arirang invested) • Managers had investment discretion

17. Korean CRF’s - Negatives • Fund structure could be improved • Mutual funds vs closed funds • Distributions • Fees • Political football – constant criticism by opposition parties hindered objectives. • Range of investments too wide (venture, work-out). • Balanced of fund size/No of investments not quite right. • Too many other funds – CBO funds, Venture funds. • Korean banks (write-offs, collateral). • Chaebol influence, family and alumni influence. • Legal background.

18. What is Required To Make CRF’s Work In Other Countries? Funds to be raised internally – Policy vs Performance dilemma. Reasonably large economy (number and size of companies) Investment discretion for Fund Managers. Liquid stock market for exits. Appropriate fund and fee structure. Clear and appropriate investment guidelines. Acceptance of best practice – Due diligence requirements.

19. Appendix – Investment Examples

20. Investment Example - Telson • Kosdaq - listed mobile handset manufacturer • CDMA licence with Qualcomm • Manufacturing alliance with Motorola • Sales forecast to rise from KRW77bn in 1998 to over KRW 300bn in 1999 • Needed capital to offset debt used to build new factory (opened April 1999) • Arirang subscribed US$5m in a November 1998 convertible bond issue for 8% stake. Converted December 1999.

21. Investment Example - Motor & Technology • Kosdaq listed motor manufacturer • ‘stepping motors’ used in CD Roms, FDDs and air conditioners • possibilities for ‘vibrating motors’ used in mobile phones • Needed capital to reduce debt and expand Chinese factory • Arirang subscribed US$6.4m at 3 times the share price for a 21.6% equity stake • Arirang took up a US$1m rights issue.

22. Investment Example - Sewon • Mobile Handset manufacturer • CDMA and GSM licence • agreement with SK Telecom • Small MP3 business • Needed funds to reduce debts incurred in setting up factory and for working capital • Arirang subscribed US$7.3m in equity for a 14% stake • Listed on Kosdaq in November 1999.

23. Work-Out Example - Chefline Corporation Introduction - the Original Investment • The Corporate Restructuring Funds (CRFs) were encouraged to execute at least one pure financial restructuring of a troubled company in the course of investing their funds. • The Arirang investment in Chefline Corporation (Chefline) in July 2000 represented a financial restructuring investment. • Chefline had agreed a “work-out” programme with creditors in April 1998 which collapsed shortly thereafter - Chefline then went into “court-receivership” (“Hwa-eui”). • In July 2000, Arirang invested W4.6bn in equity for 922,350 shares or a 48.99% holding, and W7.695bn in convertible bonds; this was part of a comprehensive restructuring. • This investment was the culmination of 18 months highly complex negotiations with 41 bank and non-bank financial institutions, the secured and unsecured creditors; the transaction involved a merger of two companies, a capital reduction, goodwill write-offs and debt rescheduling out to 2015 and 2019, all of which had to be agreed by the creditors, certain of whom had their own financial problems. • The Arirang equity investment proceeds were used for working capital, and the convertible bond proceeds were used to redeem 10% of the outstanding secured and unsecured liabilities. • The Arirang investment decision was predicated upon a hoped for strong recovery in the company’s sales and earnings to pre-crisis levels, and a consequent ability to service the rescheduled liabilities. • In July 2001, Mukoonghwa invested W2bn in a convertible bond to provide additional working capital - this CB is outside the transaction described herein. A Complicated First Phase Restructuring concluded in July 2000…..

24. Restructuring Example - CNI, Inc. (1 of 2) General Background • Established in August 1990 as a small receipt mini-printer manufacturer and computer network software company with capital of W100m and 13 employees • In 1992 entered the CAT (Credit Authorisation Terminal) business • In 1996 established subsidiary Wide Telecom to develop pager products; founded IT Information (Intelligent Building System), and merged with Seoul Information Co to strengthen mini-printer marketing • In 1997 CNI listed on KOSDAQ; paid-in capital increased to W2.7bn with 540,000 shares in issue (Soon Lee, President held 51,104 shares - 9.46%) • Also in 1997, CNI merged with IOTel to acquire pager and wireless data communication technology and established Puloon Technology to manufacture bank note sensors CNI met every criterion for investment by a CRF.

25. Restructuring Example - CNI, Inc. (2 of 2) Communication Network Interface, Inc. - CNI • By 1998, CNI had three main divisions; • Communication Software Division; communication software from host computer to PCs • Finance/Transaction Automation Division; CATs, mini-receipt printers, IC card terminal • Wireless Data Communication Division; pagers, wireless data modems and two-way messenger terminals (the data transmission service provider was Airmedia) • In 2H-1998, CNI provided the following income projections in their Investment Memorandum with wireless data accounting for 50% of revenues.W m 1997a 1998e 1999e 2000e 2001e 2002eSales 24,935 25,000 45,000 65,040 90,000 120,000EBIT 2,247 3,528 7,008 9,768 15,900 22,428Net Income 761 732 3,480 5,592 10,320 15,516 • CNI qualified under CRF investment guidelines; a venture company in technology with export potential. The original investment of W15bn was 4.5% of Arirang’s paid-in capital, the W25bn investment amount post-rights issue was 7.5% of Arirang’s paid-in capital.

26. 416,667 shares at W24,000/sh; invested amount W10,000,008,000 for a 38% stake at a 18.6% discount to the market price. Shares had W5,000 par value. 2,083,330 shares at W2,400/sh; invested amount W4,999,992,000 for a 16% stake. Shares had W500 par value following 10:1 stock splitTotal holding 6,250,000 shares for a 48.5% stake. Rights issue of 0.3435876 new to 1 old share at W5,060/sh; Arirang took up its rights subscribing to 2,147,422 shares for a consideration of W10,865,955,320.Total Arirang holding 8,397,422 shares for an invested amount of W25,865,955,320. Percentage holding in CNI is unchanged. Disposal of the “rights shares” in the market; 2,147,422 shares sold at an average W6,943.8/share to realise W14,911,300,680. Arirang holding 6,250,000 shares for a 33.2% stake. Disposal of 2,000,000 shares in the market at W5,511.8/sh raising W11,023,508,780. Recovery totals W25,934,818,460; Arirang holding 4,250,000 shares for a 21.2% stake. Disposal of 4,250,000 shares by competitive auction/block trade at W440/sh to raise W1,870,000,000. Total recovery is W27,804,878,460, or a gross return of W1,938,863,140 or 7.5% on invested amount CNI - Arirang Milestones History of the Arirang Investment in CNI Feb 1999 Mar 1999 Aug 1999 Nov 1999 May 2000 Mar 2003 Arirang was the major shareholder in CNI from the date of its initial investment in Feb 1999 until its final exit in March 2003 and made best efforts to exert influence over management.