Insolvency Fear
About 19.7 percent of the subsidiaries of Korean conglomerates are with impaired capital, or have a debt ratio of over 400 percent.
According to management evaluation firm CEO Score, out of the 1,418 subsidiaries of the 47 business groups with an asset size of at least 5 trillion won (US$4.94 billion), a total of 279 companies were categorized into a group of marginal firms and subject to cross shareholding restrictions. Out of those, 110 had impaired capital and 169 of them had a debt ratio exceeding 400 percent. The Financial Services Commission applies the highest penalty score to those with a debt ratio of 400 percent or higher when selecting main debtor group companies.
It is the Dongbu Group that has the largest number of such firms with liquidity problems. Specifically, 24 out of its 51 non-banking affiliates have impaired capital or a debt ratio of at least 400 percent. Second in line is the GS Group, where 19 out of the 78 subsidiaries have liquidity risks. Still, only GS Engineering & Construction has a relatively high debt ratio of 263 percent, and the others are affiliated with Cosmo, which is affiliated with GS.
The GS Group was followed by CJ (15 subsidiaries, 22 percent), Lotte (14, 22 percent), Hyosung (14, 34 percent), KOLON (12, 34 percent), Taeyoung (12, 32 percent), SK (11, 14 percent), and Hanwha (11, 26 percent). Meanwhile, the Young Poong Group, Amore Pacific, Kyobo Life Insurance, and Homeplus have no firms with liquidity risks.
By group, Hyundai recorded the highest debt ratio at 540.5 percent, and was followed by Hanjin (452.4 percent). Both are common in that their major subsidiaries are transport logistics companies such as Hyundai Merchant Marine and Korean Air.
40 Large Businesses Concerned over Liquidation
Many of the Dongbu Group’s subsidiaries are in the face of workout programs or court receivership, signaling additional large-scale restructuring. Approximately 40 major corporations are scheduled to be subject to restructuring next month. The creditor banks have recently wrapped up their regular credit risk evaluation on conglomerates, with a credit offering of 50 billion won (US$49.4 million) or more. They are going to finalize the list of the C-rated and D-rated firms for workout and court receivership early next month, respectively.
A total of 1,802 firms were subject to regular credit risk assessment last year, and 584 to detailed evaluation. Unfortunately, the number increased a little bit this year. That of restructuring targets has rarely decreased, in spite of the restructuring processes that continued for the past five years. Last year, 27 were found in the C category and 13 in the D category, most of which were construction firms, shipbuilders and steelmakers.
“We are planning to minimize the number of companies to be subject to court receivership and give an opportunity to the largest possible number of them, in view of the reserve conditions in the banking sector,” said one of the creditors.
In the meantime, even those engaged in preemptive restructuring in compliance with the Corporate Restructuring Promotion Act are concerned over an increasing possibility of insolvency. A couple of business groups that are currently moving ahead with financial structure improvement are expected to fall into the category of companies at risk.
“It is true that banks have become very strict in lending approval since the outbreak of the Dongbu scandal,” a commercial bank manager explained, continuing, “Besides, the current economic situations are far from optimistic, and the financial conditions of many corporations could deteriorate rapidly in the second half.” It is in this context that the financial authorities have worked on measures to protect corporate bonds and commercial paper investors since the scandal.
Banking Sector Not Free from the Impact
The restructuring process to be launched next month is likely to have a rather limited impact on the banking sector though, because the size of the credit offering by the targets is smaller than in a couple of years ago. Last year, 4.5 trillion won (US$4.4 billion) of credit offering was provided for the 40 restructuring targets, and the reserves of the financial sector was just 680 billion won (US$672 million) or so, which was much lower than the previous year’s 1.1 trillion won (US$1 billion).
Even so, banking sector participants have been dealt a staggering blow since the restructuring of STX and the Tong Yang scandal. They are still struggling to increase their reserves.
“The size of the reserves to be prepared through the most recent credit risk assessment is expected to be limited,” said another lending manager. He added, “However, the financial industry could take a serious hit in the latter half, depending on the impact of the Dongbu Group scandal.”