Progress on Corporate Restructuring
2009/09/23 5 Comments
It is true that Korean economy shows quicker recovery than any other OECD countries, but we can’t be so relieved since risky factors still exist such as slow improvement of export situation. Still, a lot of major developed countries show delayed economic recovery, threatening Korean market which relies much on export.
A corporate restructuring is one of the strategies to remove recovery-disturbing factors, a policy which will result in facilitating effective fund liquidity. Accordingly, recognizing the necessity of restructuring, the Korean government discussed current progress and determined future plans of corporate restructuring throughout the President-led economic policy meeting on Sept. 3.
Current Progress of Corporate Restructuring
Restructuring of Conglomerates
– Contractual agreements on improvement of the financial structure with the nine conglomerates: intensive self-rescue plans including subsidiary restructuring, asset dispositions, and capital expansions
– Reviewing and encouraging the self-rescue plans through the main creditor banks
– Given the first consideration to construction, shipbuilding, and shipping industries regarded as primary insolvents, 46 of the 277 companies were selected for restructuring.
– Most of the creditors and the workout companies have concluded MOUs, rescheduling debt and implementing self-rescue plans; 6 companies have already been normalized.
Restructuring of Large Individual Companies
– According to the Corporate Restructuring Promotion Act, creditor banks conduct annual credit risk evaluations on large companies with credit obligation of up to KRW50 billion; the evaluation was conducted earlier, June 10, and stricter this year than before.
– Concrete implementation based on the evaluation; 2 of 22 companies have graduated from workout.
Restructuring of SME
– Stronger risk management and evaluation & Continuous support of funds.
– Credit risk evaluation for three times until the end of November this year.
Though the policy seems like a close and tight net to select workout companies, there are several trials and errors, but some countermeasures also exist.
Issues & Countermeasures
Selection Process Stage
Possible permissive evaluation of credit risk caused by deterioration in actual results of banks and by expectation of economic recovery
-> Reviewing the ability to absorb deficits & Encouraging stricter evaluation
Possible delays in restructuring caused by different views among creditors & Bottlenecks in issuance of guarantees
-> Preparing supports as many as possible only if they would not lead moral hazard: Raising the Vessel Fund & Reducing required loan-loss provision when creditors extend new capital to workout companies
Korea appears to have been wisely dealing with the given situation. David A. Wyss, a chief economist of S&P also said on Yonhap News that Korea is doing well. However he also commented that the recovery could be slow down and global economy possibly went back to recession.
Then how does Korea prepare for the uncertain future?
Future plans of restructuring
– SME credit risk evaluation & interim conglomerate evaluation
– Disposition of NPL’s from restructuring progress: Lowering insolvent obligation to 1% until the end of this year
– Regular improvement of systems to aid restructuring: Raising funds & Stimulating M&A
As China extends its economy by importing plants, Korea and Japan have become its main suppliers. In addition to this fact, several indexes indicate that Korean market will be quickly normalized. To escape from global recession, not only prudent exit strategy but also proper aftermath management should be conducted. For the stable recovery process, it is important to carry out strict corporate restructuring without carelessness.
Let’s keep watching how Korean industries get healthier and how Korea defeats global recession~!