Painful Change

 

The Korean financial authorities put a large number of small and medium enterprises (SMEs) on the list of companies to be subject to restructuring through its recent credit risk assessment, so as to cope with the slowdown of the Chinese economy and an interest rate hike by the Fed in advance. Another purpose of the move is to protect financial systems from private-sector debts, with the size of household debts having already topped 1.100 quadrillion won (US$950 billion).

According to the Financial Supervisory Service’s announcement on Nov. 11, a total of 70 SMEs have been given C ratings, and 105 D ratings, in this year’s assessment. The number increased by 50 from a year ago to reach the highest level since 2009, when the number totaled 512.

This is because stricter criteria were applied this year. Creditor banks looked into 17,594 firms and selected 1,934 with weaker financial structures for a more detailed assessment. The latter increased by 325 from a year earlier. Previously, an in-depth evaluation was applied to those with a negative three-year cash flow from operating activities or with an interest coverage ratio of less than 1. The length of the period was adjusted to two years at this time.

A full 60 percent of the firms with C and D ratings are manufacturers. According to the Bank of Korea, the number of those with an interest coverage ratio of less than 1 rose from 2,698 to 3,295 between 2009 and last year. The C-rated companies are to be subject to workout programs, and the D-rated ones have to return to normal without the aid of creditor financial institutions or apply to the court for rehabilitation. This means that most of the D-rated ones cannot avoid court receivership. The C-rated companies not in compliance with the procedure are to be faced with debt collections, and cannot take out new loans.

Creditor-led corporate restructuring is going on in larger companies, too. This year, 41 conglomerates were categorized into the so-called main debtor group, and 11 of them have been forced to adopt self-help measures such as asset disposal, business reorganization and recapitalization. Individual large corporations underwent a regular credit risk assessment in June as well, and 35 were picked as restructuring targets. Not settling for the result, the financial authorities are going to conduct another assessment from this month to next, while planning to come up with its plan for restructuring by industry before the end of this month.

The Korea Development Institute recently said that the ratio of marginal companies recording an interest coverage ratio of less than 1 for three years in a row to the total jumped from 6.2 to 10.2 percent between 2010 and 2014, and the percentage more than doubled from 3.2 to 6.9 percent during the same period when it comes to large corporations. Under the circumstances, the upcoming corporate restructuring is characterized by its approach focusing on the competitiveness of the key industries of Korea, beyond finance, including shipbuilding, shipping, petrochemicals, steel and construction.

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