Cash-strapped Korean chaebol Tongyang makes risky bets

2013-08-29 18:52

Tongyang makes risky bets

By Kim Tae-jong

Cash-strapped Tongyang Group is facing mounting criticism as its efforts to keep afloat through bond issuance have put tens of thousands of small investors at risk.
The group, headed by Chairman Hyun Jae-hyun, has continued to issue corporate bills and bonds that could become scrap paper if, in the worst case scenario, the group files for bankruptcy as a result of a delay in restructuring.It issued 75 billion won worth of corporate bonds, Thursday. On the same day, local credit rating agencies the Korea Ratings and the NICE Investors Service downgraded ratings on the group’s affiliates, including Tongyang Securities, citing the delay in the group’s restructuring.
The group’s delayed restructuring efforts have raised the risk on its corporate bills and bonds held by some 40,000 investors and worth 2 trillion won.
The group’s debt to asset ratio stood at 1,300 percent in March, and its corporate bonds’ rating is BB-, showing a high risk of default, according to credit rating agencies. But it has successfully attracted investors by offering an annual coupon rate of around 8 percent, much higher than the market average.
Some market insiders criticize the group for neglecting to inform investors of the risks of corporate bills and bonds.
“If the group files for bankruptcy before the due date of corporate bills and bonds, investors have to face all the financial damage,” a market insider said asking not to be named. “The problem is too many individual investors have bought the group’s corporate bills and bonds.”
According to the Financial Supervisory Service, the group’s corporate bills and bonds are held by about 25,000 and 15,000 investors, respectively. Tongyang has issued corporate bills and bonds almost every month that were used for business operations and payment of maturing corporate bills and bonds.
But the group can no longer continue the practice to issue them in order to repay matured debts from October when a revised law takes effect.
Under the revision, companies with a low credit rating are not allowed to sell corporate bills and bonds through their financial affiliates. The group has sold about half of its corporate bills and bonds through the brokerage affiliate Tongyang Securities.
But the group downplayed the impact from the revised law, saying it can improve its credit rating by selling off affiliates and assets as originally planned. “The restructuring has been stalled due to too low bidding prices, but we believe we can complete the restructuring soon and secure liquidity,” an official from the group said.
In order to fix its financial mess, Tongyang announced in December that it would undertake massive restructuring.
It has pledged to sell off its non-core business units and assets and focus on cement, power generation and finance businesses, which it claims were the group’s future growth engine.
Tongyang originally planned to complete the restructuring by the first half of this year and raise 2 trillion won to secure liquidity. But it only managed to sell small business units, securing just 350 billion won or 17.5 percent of what it originally aimed to raise.
Major business units put up for sale such as Tongyang Cement & Energy and Tongyang Magic have failed to find new owners, even though they are considered the most profitable units among all affiliates.
This has led to speculations that the group is not serious about selling them. It has withdrawn from deals to sell them, citing too low bidding prices. It also changed its preferred bidders for Tongyang Magic to the KTB Consortium from Kyowon Group, which market insiders argue was a move to preserve its management right.
“The KTB Consortium consists of pensions and insurers, and this can allow Tongyang to maintain its management right after the sell-off,” a market insider said. “Tongyang also requests preemption rights, which will enable it to buy back shares in Tongyang Magic, as well as a call option.”