FSC Chairman Announcement

1. Corporate Restructuring and Viability Assessment

  • From the point of view of financial institutions, the current restructuring efforts represent a core piece of economic reform pursued by the Korean government and can be taken as a process of correcting problem loans or possible problem loans of the future that are embedded in the system

  • Along these lines, financial institutions¡¯ practices of suspending credit extension to corporates that do not possess the capacity to make repayment on their liabilities and on the other hand continuing support to corporates of which a prompt repayment is expected, in fact coincide with the process of assessing corporate viability

  • Corporate viability is assessed on a routine basis at most of the financial institutions of advanced nations and therefore it could be said that corporate restructuring is carried out on a continuous basis in those countries

  • However, the corporate viability assessment mechanism has not been put into work at financial institutions in Korea and the number of troubled corporates have been accumulating ever since, calling for the resolution to provide a one shot solution to overhaul the system, according to restructuring plans

    - Once the financial system is rehabilitated, financial institutions will be transformed and will regard the evaluation of corporate viability as an ongoing activity within their overall operations

  • Corporate viability assessment will mark the start of serious restructuring efforts toward the corporate sector and will be followed by workout plans or business exchange arrangements as a way to enhance competitiveness and efficiency, which at the end will mark the completion of overall corporate restructuring

2. Results of Corporate Viability Assessment

  • The initial assessment results of early June was not deemed satisfactory as it revealed only 14 corporates as being subject to exit, while the assessment of 7 corporates were put-off and none of the affiliates to the top 5 business groups were included

    - Confronting unsatisfactory results and with concerns that by accepting such results problems in financial institutions would continue to present serious impediments to the financial system, the FSC required the reassessment of corporates to be completed by respective banks until June 20

  • In comparison to previous assessment results, the number of corporates that will be subject to exit rose to 55 corporates, an increase of 34 corporates from the previous 21. Among the 34, 20 of them belong to the top 5 business groups representing 59% of the increase seen between the two results

    - Initially, financial institutions excluded corporates belonging to the top 5 business groups from viability assessment, as they were deemed to possess the capacity to make repayments on their loans through means like mutual guarantees within a given group

    - However, as the leading role by the top 5 business groups within the overall corporate restructuring scheme is regarded to be of significant importance,

    - the FSC directed financial institutions to assess the viability of each affiliated company of the top 5 business groups in accordance to the soundness of the individual corporate and the capacity of loan repayments etc , the same way in which other ranking business groups were evaluated

  • Although results of corporate viability assessment of the top 5 business groups reflect an aggressive and forward-looking approach pursued on the part of financial institutions, there is also concern for some weaknesses in the procedure

    - As only accounting reports that were readily available were utilized for the recent assessment, there were unavoidable limitations in identifying funding flows between affiliated companies within a business group and in turn the viability of a given affiliate within a group

3. Future Direction for Corporate Restructuring

  • In accordance to results from the first round of corporate viability assessment, a workout plan for those corporates that were identified as viable will be pursued, based on negotiations between financial institutions and corporates

    <Top 5 business groups>

  • The possibility of pursuing mutual funding arrangements among affiliated companies through insider trading deals will be eliminated and more importantly the practice of disproportionate lending toward the top 5 business groups will be overhauled

    - In the event problems in the repayment of principal on lending to a particular corporate is revealed, banks will reassess the viability of the given corporate on a voluntary basis

  • Assertive judgements on the part of financial institutions will be required for corporates who in spite of lack of competitiveness of international standards, fail to pursue a more aggressive approach in its restructuring efforts through business exchange etc. (eg; motor vehicle industry)

  • With input from outside experts, creditor banks of the top 5 business groups will make adjustments to the financial structure improvement agreement in order to provide a more detailed and feasible approach to restructuring and based on such agreement workouts will be pursued

    <Other large business groups>

  • As for corporates belonging to other large business groups, workout teams of banks will be dispatched to corporates that were identified as being viable to support efforts toward enhancement of corporate value

    - As for the 64 business groups, 8 large commercial banks will each identify by July 15, 2 business groups that will be subject to workout

    - As for other large corporates as well as relatively large sized corporates, 8 large commercial banks will each identify 10 corporates or accept applications from corporates

    <Small-to-medium sized corporates>

  • As for small-to-medium sized corporates, each bank will identify sound and promising corporates and through the special task force on small-to-medium sized corporates financial supervisory authorities will encourage banks to provide full support to such corporates

    ¢¡ The first round of corporate restructuring efforts will be completed by the end of September and possible problems that may arise throughout the overall corporate restructuring efforts will be deliberated at the Economic Policy Coordination Meeting

  • Restructuring efforts based on negotiations between creditor banks and corporates are practices used at advanced nations (eg; London approach) and we fully consider their experiences