Alternative for Corporate Restructuring
An increasing number of South Korean creditors are advocating the necessity of new ways of
corporate restructuring as the existing method characterized by voluntary agreements led by state-run banks is showing its limitations.
The existing method, which was brought in about 15 years ago, is for a restructuring target to try to go back to normal under the supervision of a creditor in the framework of a private agreement that has no legal binding force. STX Offshore & Shipbuilding is a typical example of how money-consuming voluntary agreements are. This company went into receivership in 38 months in spite of its voluntary agreement that provided no less than 4.5 trillion won. The voluntary agreements of Dongbu Steel and DK Aztec have failed, too.
At present, a total of 14 South Korean companies are in voluntary agreements with respective creditors and the number becomes even larger when the conditional agreements of Hyundai Merchant Marine, Hanjin Shipping and the like are included in the calculation. The creditors have poured whopping 10.03 trillion won into the 14 companies including STX Offshore & Shipbuilding, STX Heavy Industries, STX Engine, Dongbu Steel, Taihan Electric Wire, Sungdong Shipbuilding & Marine Engineering and Hanjin Heavy Industries. However, these companies are showing few signs of recovery now.
More and more experts are pointing out that voluntary agreements are serving as a liquidity lifeline for zombie companies instead of an effective restructuring tool. What they are focusing on now is the creditor’s track, which is a new concept of restructuring that can be defined as a combination between voluntary agreement and receivership. In short, it is to get rid of debts based on receivership before new funds are provided by creditors.
Pan Ocean, which went into receivership in June 2013, adopted the creditor’s track in its restructuring process. Creditors provided new funds for the company two months after the beginning of the receivership. The company’s business stabilized in a smooth way with its debts written off, and then Harim expressed its interest in December 2014 and acquired the company in June 2015. The receivership was terminated in the following month and the creditor Korea Development Bank could get back the 200 billion won previously spent as the new funds. In other words, the creditor’s track proved its effectiveness by ensuring Pan Ocean’s early stabilization and the creditor bank’s financial soundness at the same time.