Crisis of Tong Yang Group
Cash-strapped Tongyang Group is on the brink of bankruptcy though the 38th-largest conglomerate in Korea has been trying to sell its affiliates to remove liquidity risk. It is due to the fact that the conglomerate needs more than 1 trillion won (US$930 million) to repay maturing debt such as bonds and commercial paper within three months. In addition, the proceeds from the sales of its subsidiaries are not enough to cover debts worth more than 3 trillion won.
According to sources in the investment banking industry, the net debt owed by the group’s non-financial units amounted to 3.1 trillion won (US$2.79 billion) as of 31 December 2012. In particular, commercial paper, whose maturity date arrives before the end of the year, approaches 800 billion won (US$745 million), while corporate bonds exceed 300 billion won (US$279 million). Since Tong Yang needs to secure more than 1 trillion won (US$930 million) within the year, it decided to sell its affiliates.
The timing, however, seems not to be on Tongyang’s side. In spite of the sales offer of its subsidiaries, the deal has not been successful in securing enough money to pay for bonds and commercial paper worth 1 trillion won (US$930 million) to be matured at the end of this year. Generally, it takes at least three months for the merger and acquisition process to be finalized from a sales announcement to the selection of a preferred contender.
Finally, the group had no choice but to file for court receivership so as to avoid bankruptcy. On September 30, Tongyang Group’s three affiliates Tong Yang Inc., Tong Yang Leisure, and Tong Yang International filed for a rehabilitation proceeding so as to avoid defaulting on bonds and commercial paper worth 110 billion won (US$102 million) that matured on the day. Thus, the possibility of raising 1.1 trillion won (US$1.0 billion) for future bonds and commercial paper appears to be slim at the moment.
Nevertheless, the group does not have much to offer. The sales value of Tong Yang Inc., Tong Yang Leisure, and Tong Yang International is considered to be low, owing to unattractive characteristics of their business.
Anyway, as Tong Yang Leisure and Tong Yang International filed for court receivership, about 200 billion won (US$186 million) or 33.8% or of the shares of Tongyang Securities that the two companies retain will be the first going up for sale. Accordingly, the sale of its financial arm, Tongyang Securities, is inevitable.
The sale of the group’s another key unit Tongyang Power is also unavoidable. Its value is estimated to be in the range of 800 billion to 1 trillion won (US$744 billion to US$930 billion). Although several large companies are reported to be interested in the company, none of them are willing to acquire the company right now on account of the widely-circulating rumor that the Tongyang Group is about to fail.
Even with the sales offer of Tongyang Power and Tongyang Securities, the market thinks that the group missed the boat. Tongyang Group tried to keep Tongyang Power that is considered to be the group’s nucleus. Nevertheless, the group ended up offering to sell the entire stake in its power unit valued at 1 trillion won (US$930 million). But the market considers the gesture to be too late.
Tongyang Securities also is not expected to attract candidates for its business sales soon. It is attributable to the company’s increased risk, such as its deteriorating reputation arising from its prolonged role as the core affiliate that finances and supports the group. Its profit-generating ability is also thought to be decreased.
A head researcher of a securities firm said, “The situation that the securities industry faces is not good. Besides, Woori Investment & Securities is already for sale. So, it will not be easy for Tongyang Securities to find an acquirer.”
Even with the intentions of the chairman and his family to keep the tech services affiliate by handing over their assets, many think that maintaining the group itself will not be easy.
The prospect of Tongyang’s dissolution appears to be looming large. The last hope, however, is in its cement business, since it has been the group’s backbone from the beginning. For this reason, there is some possibility that Tongyang Cement will be the last company in the group.