Process of main debtor company designation to be revised

The Financial Supervisory Service will strengthen the role of a main creditor bank and change the criteria for designating a main debtor company to prevent the fiasco stemming from the collapse of Woongjin Group last year.

A main debtor company receives loans above a certain amount from financial institutions. The criterion for designation as a main debtor company is 0.1 percent of all debts lent by financial institutions at the end of the previous year. The standard to determine such a company was 1.46 trillion won (1.32 billion U.S. dollars) last year, but went up to 1.61 trillion won (1.5 billion dollars) this year.

If a company is designated a main debtor due to excessive debts, the main creditor bank collectively manages the troubled company. Among those companies, main creditor banks signs agreements with companies in question to improve financial structure.

Thirty-four conglomerates in Korea are designated main debtor companies, with STX, Dongbu, Hanjin, Kumho Asiana, Taihan Electric Wire and Sungdong Shipbuilding & Marine Engineering agreeing to improve their financial structures with their main creditor banks.

The problem is that though they are not required to sign agreements to improve their financial structure or are main debtor companies, certain entities could be forced to undergo rehabilitation due to a financial crunch. Woongjin Group is a prime example of this, having abruptly applied for rehabilitation while discussing signing an agreement to improve its financial structure last year.

Financial authorities are considering a plan in which a company classified as a main debtor company collaborates with its main creditor bank when pursuing a large-scale merger or acquisition deal or enters a new business to prevent another Woongjin-type fiasco. One measure under consideration is effective sanctions if the company in question declines to submit related documents or hold prior consultations when the main creditor bank demands data on corporate governance structure and financial situations.

The financial watchdog also plans to change the criteria for designating a main debtor company. One action receiving positive consideration is reflection of market-sourced loans, including corporate bonds or commercial papers, when calculating the amount of loans extended to companies. This is to prevent a company from dodging the main creditor bank’s management and supervision by repaying bank loans by mobilizing corporate bonds to avoid regulatory oversight as a main debtor company.

Lee Byeong-sam, chief of the corporate finance improvement bureau at the Financial Supervisory Service, said, “We started discussions by forming a task force on the strengthening of the main creditor bank’s role and the criteria on the designation of main debtor companies. We`ll finalize a plan by the end of April,” adding, “A stronger role for the main creditor bank could be implemented from this year if guidelines are made available. The new criteria for designation of a main debtor company will likely be applied from next year.”

crystal@donga.com