Workout Program Since Financial Crisis Completed the First Stage

Company Revival is a Half-success—

In 1998, the Korean government set up an internal standard stating that a company under a workout program could be considered as “restored” if the company’s interest compensation rate turned out to be more than 1.5.

According to the Korea Information Service, 41.4 percent of the companies under a workout program but operating as of the end of 2003 have their interest compensate rate over 1.5, whereas 58.6 percent are below 1.5. After all, the result of the company revival plan through a workout system is only “less than half-successful.”

Kang Dong-soo, a researcher of the Korea Development Institute, said, “During the financial crisis, it must have been far more important for the government to enhance the transparency of financial institutions by improving the local banks’ rate of return than to boost the company revival.” He estimated that the banking sector’s corporate restructuring ability has been considerably improved as they strived to pay back three times more than the principal of the bonds to the group of creditors who had supported workout companies.

Clearly, the financial sector demonstrated its corporate restructuring ability through a workout system while handling the case of SK Networks (formerly SK Global) in March of last year.

During the financial crisis period, Hana Bank received good commendation that it successfully dealt with the local creditors and foreign creditors, since the discrimination between these groups had been pointed out as a major problem during the early stage of the workout process.

Verifying Gems and Stones among the Companies, Has it been Well Done?—

Experts are saying that the workout program was too focused on bond collection, which resulted in its poor achievement in distinguishing good ones from bad ones.

Choi Bum, head of an overseas business unit of Korea Asset Management Corporation, pointed out that the biggest problem of workout is the “absence of a long-term vision” which the government who initiatively introduced the program should have applied to its industrial policy.

He added, “Under the situation in which the government had no idea of guidelines in view of future development engines, vital questions of companies was totally up to the bank’s decision, generating some cases that a recoverable company was forced to be liquidated or a to-be-dead company became alive.”

Some of the chemical fiber manufacturers and paper companies, which were able to stay alive due to the assistance of creditors, were pointed out as having affected a normal competition system among their industry sectors.

Meanwhile, the principles regulating creditors to handle workout companies recently have hinted at some changes. The creditors of Daewoo Shipbuilding and Marine Engineering Co. lately stipulated that it would exclude foreign companies including China from the candidates for M&A bidding. They are concerned that competitiveness of Korean shipbuilding industry will be severely damaged if the world’s third biggest company falls into Chinese hands.

Should Make Haste with “The Graduation from Debt-workout Programs”—

The Financial Supervisory Service reported that only 16 companies out of 35 workout companies whose majority shareholders are creditor groups have succeeded to find a new owner as of April 2004. The large part of the remaining 19 companies have finished their workout programs and gotten back on track, but they are still under the management by creditors.

It is highly possible that competitiveness of the company will weaken if the management by creditors, especially in financial sector, extends longer, said the experts.

However, banking industries forecasted that disposal of workout companies is unlikely to happen in the short-term, considering that there are many banks whose majority shareholder is the government.

A vice-president of corporate restructuring division of a local bank said, “If you sell a company, you will have to bear excessive burdens in order not to be blamed for ‘selling at a giveaway price’.” He said that it is getting even tougher to operate company disposal these days, since labor union and executives of workout companies are worried about their employment status and therefore opposed to finding new company owners.

“A company, just like a human being, will loss the probability to live as it lays in ‘intensive care unit’ too long,” Hana Bank President Kim Seung-yu, who succeeded in early-graduation of Namkwang Engineering and Construction Co. from workout program, explained. “It is advisable that local banks take action to find ways for the companies of profit-making solutions and help them complete workout programs as soon as possible. Eventually it will be good for both the company and the bank.”