Restructuring of SMEs
Over 100 small and mid-sized enterprises (SMEs) in Korea are likely to undergo restructuring with the recession amid the consecutive defaults of affiliates of conglomerates this year, such as STX Group and Tong Yang Group, the largest number since the peak of the financial crisis in 2010. Last year, major South Korean builder Kukdong E&C and its holding company Woongjin Holdings also filed for court receivership.
Around 40 large companies are expected to undergo restructuring this year, up 10 percent from 36 of last year. The consecutive large companies’ bad situations have resulted in another spate of bankruptcies of the subcontractors, i.e. SMEs. As many SMEs have done business with larger companies -- either as a subcontractor or an affiliate -- the consecutive defaults by large companies may have eroded the financial health of SMEs, the Financial Supervisory Service (FSS) said.
According to industry sources, the FSC and creditor banks will soon complete a detailed credit risk evaluation of 1,100 SMBs that borrowed five billion won (US$4.67 million) to 50 billion won (US$46.7 million) and face a possible bankruptcy. The 1,100 companies have been on the top of the list due to deteriorating operating cash flow and asset quality in the last three years. Most of them are in the sectors such as marine shipping, shipbuilding, and construction.
The creditor banks placed 97 SMEs on the list of restructuring last year, 45 of which received C grade and 52 D grade. This year, the number of SMEs subject to restructuring will easily surpass that of last year. More than 100 SMEs are forecast to be graded C or D. The creditors have been reviewing their credit risks to select the SMEs subject to either a creditor-led debt workout which is categorized to a "C" grade, or court receivership which is graded as "D."
Creditor banks said that the aggressive Park Geun-hye’s government support policy for SMEs is cited as one of the reasons that more SMEs are encountering credit risks. Domestic banks actually have expanded loans to SMEs in line with the policy, reaching 27.7 trillion won in the January-August period, almost equivalent to the total of 2012.
Under such circumstances, the FSS is expected to soon roll out measures aiming at helping SMEs ease their financial burdens in order to minimize losses from large companies’ liquidity shortage.