Fears spread over chaebol’s debts; Investors, creditors study balance sheets after Tongyang’s woes

Fears spread over chaebol’s debts

Investors, creditors study balance sheets after Tongyang’s woes

BY MOON GWANG-LIP [joe@joongang.co.kr]

Oct 04,2013


A group of investors in Tongyang Group bonds stages a protest near the residence of Chairman Hyun Jae-hyun yesterday afternoon after allegations arose that the company issued fraudulent commercial paper

In the wake of the sudden financial meltdown of Tongyang Group, one of Korea’s top 40 conglomerates, attention is shifting to the debt levels of other large companies. Rumors are spreading in the local financial industry that some affiliates of Dongbu Group, Hanjin Group, Hyundai Group and Kolon Group – all within the top 40 – could face the same fate as the Tongyang subsidiaries now under court receivership. Financial authorities are cautioning against overreaction from investors and creditors-? they don’t want scared creditors making things worse for companies by calling in debts. But, some market analysts say that the Tongyang crisis may serve as a wake-up call for overdue financial reforms at many conglomerates.

Chaebol Leverage

Korea has been praised for getting through the global financial crisis unscathed, but in the eyes of Choi One-lack, a researcher of the Korea Economic Research Institute, there’s an “illusion” shielding many Korean conglomerates.
“As Samsung Electronics and Hyundai Motor have been riding the global markets, some could easily be led to believe that all Korea conglomerates are faring well,” Choi said. “But if you look at the data, most of the other companies are seeing a continuous decline in their profit margins.”
According to a survey of 16 local commercial banks by the Bank of Korea released this week, the banks’ lending attitude toward large-sized companies for the fourth quarter remained at minus 3, the same level as for the third quarter.
The projected lending attitude demonstrates how willing banks are to provide loan. The lower the number, the lower the enthusiasm, and minus 3 is low.
The concern over companies’ financial conditions was a factor, the central bank said, and some large companies are getting more worried attention than others. The Dongbu Group’s construction and engineering arm saw its debt to equity ratio surge to 500 percent as of June. The building contractor had its credit rating slashed from stable to risky early this year. The entire group needs to pay back 519.8 billion won ($483.8 million) worth of debt in the first half of next year.
The sluggish local construction market is also taking a toll on the construction subsidiary of Kolon Group because construction and real estate are weak spots in the economy.
The 27 largest building contractors in Korea will have to pay around 4.8 trillion won worth of maturing debt on company bonds next year.
The 10 largest have 300 billion won worth of debt maturing on commercial paper next year, and the bankruptcy of one company could trigger a chain reaction if creditors get spooked.
Hanjin Group has two worrisome affiliates: Korean Air and Hanjin Shipping, whose debt ratios stand at 1,088 percent and 775 percent, respectively.
Hyundai Merchant Marine is bearing the brunt of the slumping global shipping industry, and its debt ratio has risen to 895 percent.
Doosan Group is groaning under the financial burden of purchasing the American company Bobcat in 2007.
The debt ratio of Doosan Heavy Industries grew from 200 percent late last year to 371 percent as of June this year.
Tongyang’s crisis followed that of STX Group, whose March bid to sell STX Pan Ocean, the flagship of the group, shed light on its fast deteriorating financial conditions.
STX entered a group-wide restructuring program and STX Pan Ocean and STX Construction are now under court receivership. The group also sold STX Energy to a Japanese company.
An official of Dongbu said that Dongbu Construction will secure sufficient capital to pay back the maturing debt by selling some of its assets.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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