Risk Management
Financial authorities who burnt their fingers in the Tongyang Group scandal are now enforcing the risk management of large enterprises.
Authorities decided to extend the selection standards for the “main debt affiliation” policy managing insolvent enterprises to over 13 additional large enterprises. Enterprises are escaping the main debt affiliation selection, which is based on loans from financial institutions like banks, by using marketability loans such as corporate bonds or CPs. With the new standards of main debt affiliation selection, 30 main debt affiliations as of this year will be increased to 43. Most large enterprise affiliates which have paid back their bank loans with marketability loans such as company stocks and CP will be included in the main debt affiliation system once again.
However, increasing the number of enterprises under management is creating doubts whether it would be possible to keep the same level. With banks unable to control large enterprises aggressively, doubts on a main debt affiliation system are increasing as well. Many criticize this measure as a “policy for show” to avoid criticism of bad management, and that it will only make things worse for the enterprises that have handed over their keys to the banks.
The main debt affiliation policy began for creditor banks to manage the insolvent signals of large enterprises ahead of time. It is for large enterprises, which last year’s financial institutes’ credit offering amount is 0.1% or higher than the total credit offering amount from two years ago. Accordingly, this year, 30 enterprises including Hyundai Motors, Samsung, SK, and LG, which remaining credit offering amount in 2012 was 0.1% or higher (1.6152 trillion won, US$1.5199 billion) than the total credit offering in 2011 have been selected as main debt affiliation targets.
However, large enterprises managed to avoid the selection by paying the bank loans off with corporate bonds or CPs. Their financial structures have not been improved but they were no longer under management. The Tongyang Group and Hyundai Group are examples. In 2001, 60 enterprises with top credit offerings were under management, and then in 2002, 35 were selected by credit offering rates. The number continued to decrease to 41 in 2010, 37 in 2011, 34 in 2012, and 30 in 2013.
The Financial Services Commission will lower the standard to 0.075% for next year’s selections. By this year’s standards, 43 enterprises belong to the main debt affiliation. This is close to the one in 2009 (45) when the number was the highest since the main debt affiliation deregulation in 2002.
Head of Financial Policy Bureau Kim Yong-beom said, “If the standard drops to 0.075%, most enterprises excluded from the main debt affiliation due to marketability loans (with less bank loans) will be included again.”