Starting from next year, large business groups reducing their loans in the financial sector and increasing their borrowings in the capital market by using debentures and commercial papers are classified as main debtor groups subject to ongoing corporate restructuring. This is because the Financial Supervisory Service changed its main debtor group selection criteria on June 4 for the first time since 2009 in the wake of Asiana Airlines’ recent accounting scandal.
Specifically, in the new criteria, the concept of total borrowings including capital market borrowings replaces loan- and guarantee-centered total credit exposure so that the liquidity crisis of a single company attributable to market borrowing is blocked from spreading to the financial sector as a whole.
According to current provisions, main debtor group classification is applied when financial credit exposure as of the end of the preceding year is 0.075 percent or more of the total financial credit exposure as of the end of the year before that year. From 2020, however, the classification is applied when total borrowings are 0.1 percent or more of South Korea’s nominal GDP and banking credit exposure is 0.075 percent or more of the total corporate credit exposure of all banks. In other words, business groups with a lot of capital market borrowings are going to be classified as main debtor groups regardless of their financial loans.
The system change is because corporate financing has diversified and the current system is inadequate for ongoing corporate restructuring. In the past, large corporations relied on bank loans for large-scale investments. With the capital market growing, however, they are borrowing more and more in the capital market. According to the Financial Supervisory Service, main debtor groups’ ratio of debentures and commercial papers to financing in the financial sector jumped from 40.7 percent to 68.2 percent from 2010 to 2018.
The inadequacy resulted in the accounting scandal of Asiana Airlines in April. Earlier, the company’s financial structure deteriorated and it failed to get sufficient banks loans. Then, it resorted to the capital market by issuing asset-backed securities worth approximately one trillion won. A liquidity crisis emerged after the scandal, yet the financial authorities and creditor banks had a hard time restructuring Kumho Asiana Group.