Over 100 Korean SMEs are likely to be put under court- or creditor-led debt restructuring programs as the result of credit crunches at some big firms

October 8, 2013 Leave a comment

2013-10-07 17:52

Over 100 SMEs may be up for forced restructuring

By Na Jeong-ju
Over 100 small- and medium-sized enterprises (SMEs) are likely to be put under court- or creditor-led debt restructuring programs as the result of credit crunches at some big firms. The Financial Supervisory Service (FSS) is currently evaluating default risks of some 1,100 SMEs jointly with their creditor banks. Most of them are involved in the construction, real estate, shipbuilding and shipping businesses, which have remained in a protracted slump.“We will pick firms in the worst condition. They will have to face debt restructuring programs,” an FSS official said. “The number may surpass 100 for the first time since the 2010 financial crisis because banks are tightening lending rules and firms are facing difficulties in securing funds through bond issuances.”
The gloomy outlook reflects concerns that a series of corporate failures in recent months will put smaller businesses in deeper trouble.
Tongyang Group, the country’s 38th-largest conglomerate, filed for court protection for five of its affiliates last month after failing to repay their debts. About six months ago, STX Group, the 13th-biggest firm, also defaulted.
Analysts have warned that more conglomerates may follow Tongyang and STX, and file for bankruptcy.
They say the defaults by big firms may erode the financial health of smaller businesses because many of them have business ties with large companies as subcontractors.
“The prolonged slump has seriously damaged business conditions for major firms, especially in the shipbuilding, construction and shipping industries,” a Seoul analyst said. “The average ratio of operating profit to sales among shipbuilding firms dropped to 4.2 percent last year from 8.4 percent the previous year. The figure for construction firms also plunged to 0.1 percent from 2.0 percent. The ratio for shipping firms has been below zero for the past two years.”
The FSS said it will unveil a set of measures soon to address debts held by SMEs.
“We are closely monitoring the financial status of smaller firms, with the focus being placed on their cash flow,” another FSS official said. “We’ll make sure the companies turn themselves around, guided by the main creditors, while pushing for an extension of bank lending to help them improve their financial condition.”
The firms in the worst conditions will be subject to either a creditor-led debt workout, for which it will be given a “C” grade, or court receivership, which is graded as “D.”
Last year, 97 firms received C or D grades. Following the 2010 financial crisis, a total of 121 SMEs were placed under debt restructuring programs.
Regulators have urged major banks to strengthen monitoring of balance sheets of troubled companies on concerns that worsening economic conditions will force more firms to become marginalized.
Currently, banks conduct an inspection of firms’ financial soundness once a year and draw up a list of companies requiring restructuring in the second half of the year. The FSS recently urged lenders to weed out “hopeless” firms, regardless of the annual inspection schedule.

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