Demise of ‘too big to fail’; Tongyang, once one of the top 10 conglomerates, has failed to adjust itself to the changing business environment

2013-10-01 17:11

Demise of ‘too big to fail’

Tongyang Group appears headed for a breakup as its main affiliates applied for court receivership after being squeezed by liquidity woes for long. Following the court receivership applications by three affiliates, including Tongyang Inc., Monday, Tongyang Cement, the conglomerate’s flagship company, and Tongyang Networks filed for bankruptcy protection Tuesday.Given that Tongyang Group’s debt to banks and other financial firms is relatively small (1.4 trillion won to be precise) and its crisis has widely been known, the impact on our economy will be limited.
Nevertheless, it will be inevitable that tens of thousands of retail investors, who purchased corporate bonds and commercial papers issued by the troubled Tongyang affiliates at high interest rates, will suffer huge losses. It simply defies our understanding that the individual investors have to bear most of the brunt because institutions were barred from buying Tongyang-issued bills classified as having non-investment grades.
The 38th-largest business group’s recent plight stems from its overblown business expansion, especially since the global financial crisis in 2008. Tongyang, once one of the top 10 conglomerates, has failed to adjust itself to the changing business environment. More importantly, it failed to secure funds after missing the timing for selling its key assets.
The financial regulator deserves criticism for failing to take proper measures to protect investors, particularly retail ones. The fact is that Tongyang, like Woongjin and STX that had filed for court receivership due to liquidity woes, managed to survive by selling commercial papers, a short-term funding vehicle with maturities of 3-6 months favored by financially-stricken companies, even as it was obvious that investors would take a hit sooner or later. In fact, businesses are able to issue commercial papers without any legal regulations; there is no need to win approval from the corporate board and there is no upper limit.
Even more problematic is that the group’s key affiliates have been able to sell their corporate bonds and commercial papers through its financial subsidiaries, including Tongyang Securities. That won’t be possible any longer because the Financial Services Commission will prohibit brokerage firms from selling low-credit corporate bonds later this month, but this is like mending the fences after the horses have run away.
The news that the combined debt of the nation’s 30 largest conglomerates nearly doubled in five years is certainly concerning, especially now that three conglomerates have filed for bankruptcy protection in recent months.
Obviously, the government needs to do its utmost to minimize the damages to retail investors. Simultaneously, the financial regulator should take preemptive actions so that no more conglomerates will plunge into serious financial woes.