Lone Star on Wednesday rejected a South Korean audit agency’s conclusion that its acquisition of Korea Exchange Bank in 2003 was “illegal,” claiming that the lender’s capital adequacy ratio was actually overstated rather than understated.

In the latest turn of the long-running controversy over the deal, John Grayken, Lone Star’s chairman, said it was “impossible to accept” the accusations that KEB’s financial data were manipulated to allow Lone Star to take over the bank.

The comments came after the state Board of Audit and Inspection (BAI) asked the Financial Supervisory Commission to nullify Lone Star's purchase of KEB. The audit agency claims that KEB was sold at an artificially low price after some government officials and former KEB managers conspired to understate the financial health of the bank.

Mr Grayken on Wednesday hit back claiming that the Bank for International Settlements ratio forecasted for KEB was “actually too high” in hindsight, because the loan loss provisions that were required to be taken by KEB after Lone Star’s investment would have caused the bank’s BIS ratio to fall below the ratio projected before the sale.

He added that the FSC’s response should be to order Lone Star to reduce its 64.62 per cent stake in KEB to below 10 per cent, even if the BAI’s accusations that the BIS ratio was lowered through a “conspiracy” were true.

“This is exactly what Lone Star has stated it intends to do and has been prevented from doing because of the ongoing controversy,” he said in a statement.

In November, Lone Star scrapped a $7.3bn deal to sell KEB to Kookmin Bank, South Korea’s top lender, as a year-long investigation by Korean prosecutors into suspicions over its 2003 acquisition of KEB blocked the completion of the sale.

Under Korean banking industry regulations, a private equity fund cannot take over a bank unless it is deemed insolvent. Mr Grayken said Wednesday: “Why would those government agencies accept that another major Korean bank was on the verge of failure without carefully scrutinizing the facts upon which that assertion was supposedly based?”

KEB shares fell 2.74 per cent to close at Won14,200 on Wednesday, underperforming the broader market.

“The shares are likely to remain in a corrective phase for the time being as uncertainties over the future of the bank increase with the growing possibility that the sale of the bank will take a long time,” said Im Il-sung, an analyst at Meritz Securities.

Get alerts on Financials when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article