Restructuring of Large Businesses

The Bottomless Pit in Mammoth Cave National Park, U.S.
The Bottomless Pit in Mammoth Cave National Park, U.S.

 

Approximately 10 major corporations in Korea are expected to be subject to restructuring this year, led by the financial authorities and creditors. The estimated number increased by 3-4 due to the recent slump in the construction, shipbuilding, and shipping industries. At the same time, a couple of other business groups are likely to be selected as the targets of strict management against insolvency, though they won’t sign an agreement for financial structure improvement. 

According to industry sources creditors, the Financial Supervisory Service, and the Financial Services Commission are planning to pick about 10 groups, including the Hyundai Group, as the targets of the financial structure improvement agreement for this year. The number of candidates is currently 42, all of which are in the main debtor group of relatively higher indebtedness. 

Late last year, the main creditor banks classified 42 companies into the main debtor group, where the credit granting balance in the banking sector exceeded 0.075 percent, or 1.2251 trillion won (US$1.1981 billion) of the total balance, and has assessed their financial structures since then. The number of the main debtor group companies was 30 in 2013. 

Last year, the financial structure improvement agreement covered Hanjin, STX, Dongbu, Kumho Asiana, Taihan Electric Wire, and Sungdong Shipbuilding. STX, Taihan Electric Wire, and Sungdong Shipbuilding failed to address their liquidity problems and were put to a voluntary agreement tighter than the financial structure improvement agreement. Kumho Asiana concluded a workout agreement with its creditors, too. Only Dongbu and Hanjin are fulfilling the financial structure improvement agreement as of now. Newly added to the main debtor group this year are Halla, SPP, Hyundai, Hankook Tire, Aju Industry, E-Land, Daesung, Hansol, Pungsan, Hite Jinro, Booyoung, Hyundai Development Company, and STX Offshore & Shipbuilding. 

The financial structure improvement agreement is for those in the main debtor group considered to be more vulnerable to move ahead with financial structural reform by means of an agreement with the main creditor banks. The voluntary agreement, in the meantime, is characterized by a certain grace period for debt redemption or emergency fund support against a short-term liquidity crisis. In the workout agreement, which is stricter than both of the two, the receivables are classified into a substandard loan for full-scale restructuring.

The creditors are planning to apply intensive restructuring programs, including the disposal of key assets and layoffs, to 10 of the big businesses this year. They are going to be quite strict this year in the wake of the huge allowance for bad debts from STX and the like. 

The Financial Supervisory Service and the Financial Services Commission are striving to stabilize the financial market as well by speeding up the restructuring of the Dongbu and Hyundai Groups. On April 30, the latter decided to sell the LNG Business Division of Hyundai Merchant Marine to IMM Investment at 1.03 trillion won (US$1.00 billion), raising the rate of fulfillment of its self-help plans to approximately 60 percent. Dongbu is also having talks with POSCO to sell the Incheon plant of Dongbu Steel and Dongbu Dangjin Power, two of its core subsidiaries. 

Dongkuk Steel and Hanjin Heavy Industries are predicted to be subject to strict management, which is a newly-created category. The main creditor banks are to monitor the companies on an ongoing basis, since these are likely enough to be included in the financial structure improvement agreement in the near future. The new system was established to deal with the loophole used by some companies that passed the financial structure assessments but then filed abruptly for court receivership. The targets have to conclude an information provision agreement with the main creditor banks and go through negotiations with them prior to any important marketing activities. 

Bad Loan Bomb Ticking for Local Banks 

With the restructuring of large poor-performing businesses, the local financial circle is expected to be impacted greatly by large businesses’ bad loans to local commercial banks, estimated to exceed 25 trillion won (US$24 billion).

Moreover, creditors will designate another 10 companies out of 42 financially unhealthy companies, including Hyundai Group, as financial restructuring agreement targets.

In this grim financial backdrop, local banks cannot dare to voice their demand to ease bad debt appropriation installment standards, following companies’ restructuring.

According to the Korea Federation of Banks (KFB), NICE Information Service Co’s KIS-LINE, and Woori Investments and Securities on May 12, the financially unhealthy conglomerates’ exposure is estimated to reach 25 trillion won (US$24.5 billion), a new burden on local banks.

The figure was calculated via financial assessment scoring based on the Financial Services Commission (FSC)’s “Relevant systems Improvement Measures to Prevent Corporate Defaults.” The assessment excluded non-financial elements. Also excluded were repurchase agreements, undefined payment certificates, and credit sales bond mortgage loans from the total of the credit balance of conglomerates’ affiliates.

Most conglomerates that are likely to be newly subject to financial restructuring agreements this year had a credit rating of A-B. The A-C groups that are highly likely to be subject to new financial restructuring agreements harbored exposure that reached 9.7 trillion won (US$9.5 billion). The D-G groups that are subject to new agreements were estimated to have 16.8 trillion won (US$16.4 billion) in exposure.

By bank, Korea Development Bank (KDB) had the largest new credit exposure at 7.9 trillion won (US$7.7 billion). Out of this, the A-C groups most likely to contract financial restructuring, had an exposure amount reaching 1.8 trillion won (US$1.76 billion). Next in line was Korea Exim Bank with 4.6 trillion won (US$4.9 billion).

Hana Bank had the estimated exposure of 3.9 trillion won (US$3.8 billion), and Woori Bank had 3.8 trillion won (US$3.7 billion).

NH Nonghyup (1.4 trillion won, US$1.4 billion) and Shinhan Bank (1.2 trillion won, US$1.2 billion) were estimated to have exposure exceeding 1 trillion won (US$976 million).

Other banks include Kookmin Bank (912 billion won, US$890 million), Daegu Bank (408 billion won, US$398 million), Su-hyup Bank (308 billion won, US$300 million), Kyongnam Bank (216 billion won, US$211 million), Kwang Ju Bank (177 billion won, US$173 million), Busan Bank (119 billion won, US$116 million), Standard Chartered Bank Korea (79 billion won, US$77 million), JB Bank (80 billion won, US$78 million), Citibank Korea (79 billion won, US$77 million), and the Industrial Bank of Korea (36 billion won, US$35 million) in exposure.

The default problem does not seem to end here. According to The Bank of Korea’s “Financial Stability Report” to the National Assembly, the number of marginal businesses with below 100 percent in interest coverage rate rose from 2,019 in 2009 to 2,965 in 2012.

In this light, a voice is demanding that financial aid should be cut off to financially unviable companies. While financial viability requires a prudent judgment, financial support to irrecoverable companies seems like pouring money into a bottomless pit.

As of the end of 2013, local financial institutions’ exposure against marginal firms amounted to 85.8 trillion won(US$83.7 billion) in total.

The banks are complaining that they are the victims of regulations from the past. One local bank associate expressed his woes, “The financial authority applied pressure in one way or another on creditor banks that were cut off. We are heavily burdened with bad loans.”

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