Creditor Banks Preparing to Weed Out Nonviable Companies

Under the government’s guidelines for corporate restructuring that aims to weed out nonviable companies and support viable ones suffering from temporary liquidity shortages, creditor banks are preparing their own restructuring measures.

Each creditor bank is speeding up the grading of companies by sector to sort out the winners from the losers.

Full-fledged restructuring, however, will begin between February and March after banks obtain corporate earnings reports early next year.

○ No. of nonviable companies rising

Bank officials in charge of corporate credit say the number of nonviable companies will rapidly increase.

“Companies to be liquidated will come from those under ‘caution,’ which comprise five percent of the companies we extended loans to,” a source at Korea’s largest lender Kookmin Bank said yesterday.

An official at the state-run Korea Development Bank said, “Normally, the share of companies with the rating ‘early warning’ is five percent. But the figure is gradually rising due to deteriorating economic conditions. We are closely watching those companies.”

According to Bank of Korea data on 1,140 manufacturers, 30.8 percent were in the red in the third quarter and unable to pay interest on their debts.

Shinhan Bank has set up a corporate restructuring division and another task force to manage companies in construction, shipbuilding and shipping. For small and mid-size enterprises and small office/home office companies, or SOHOs, the bank is reviewing debt-to-equity and liquidity ratios.

Woori Bank will also establish a corporate restructuring support division with two subdivisions for corporate improvement and resuscitation. The first subdivision will handle debt workouts and the second companies going under court receivership.

“The government intends to assist companies suffering from a temporary cash crunch. But we should wait until early next year when 2008 earnings reports show which companies should be liquidated,” the vice president of a commercial bank said on condition of anonymity.

○ Large companies to face restructuring first

A government official in charge of corporate restructuring at a corporate financial support organization said, “Banks are evaluating large companies through assessment and monitoring. Smaller companies will mainly get support for the time being, but as restructuring for large companies proceeds, they will also undergo restructuring.”

Under the Corporate Restructuring Promotion Act, a company borrowing more than 50 billion won (36.8 million U.S. dollars) from creditor banks is subject to restructuring. The restructuring of a company with debts of less than 50 billion won, however, is left to the discretion of the banks. Financially distressed builders are being encouraged to join a debt rescheduling program by creditor banks and cash-strapped small- and mid-size companies can get support from the “fast track” program.

Whether a company will undergo restructuring depends on its financial soundness as judged by creditor banks. On a scale of one to 10, those with scores between one and four are deemed sound and those between five and seven are considered part of the “gray zone.”

Most small and mid-size companies belong to the gray zone and the majority of builders and shipbuilders are on the borderline.

Normally, those rated six and over are rated “early warning” and those seven and over “need caution.”

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