Troubled Korean companies misuse CPs (commercial paper); Companies facing cash shortage problems issue bills until the moment they go bankrupt or seek court receivership. This damage is then passed on to investors

2013-10-11 16:27

Troubled companies misuse CPs

Experts call for more release of firms’ financial information
By Kim Rahn

When several large companies collapsed from liquidity shortage in recent years, it also caused a collapse of retail investors who purchased their corporate bills. While the recent court receivership of Tongyang Group is likely to inflict losses on more than 12,000 such bill buyers, analysts say that the corporate bill system is misused by cash-strapped companies amid loopholes in the regulations.According to the Financial Supervisory Service (FSS) and brokerages, more than 12,400 retail investors bought the corporate bills of Tongyang’s troubled affiliates worth 458.7 billion won, including 166 billion won for Tongyang Leisure and 291 billion won for Tongyang International.
Of the investors, over 99 percent were individuals because institutional investors did not purchase Tongyang’s bills as they were aware of the group’s vulnerability, while retail investors, unaware, bought the bills that promised high returns.
It was not the first time that a problem involving corporate bills has emerged.
In July last year, Woongjin Group was suspected of having issued corporate bills valued at 120 billion won although it was aware that its credit rating would drop soon and would be unable to issue them anymore. The group’s holding company and a construction arm filed for court receivership about a month after the issuance.
LIG Group also sold bills worth 180 billion won to investors until March 2011 when its construction affiliate filed for court control. The law enforcement authorities found that the group did so after fabricating financial statements while it had already planned the receivership at the end of 2010.
A local court recently sentenced group Chairman Koo Cha-won and his son, Koo Bon-sang, vice chairman of LIG Nex1, to three and eight years of jail terms, respectively, on fraud charges.
As can be seen in those cases, corporate bills are often used as a last resort for marginal companies to secure liquidity. This is because the corporate bill issuance process is simpler than that of corporate bonds: while companies should report bond issuances to the FSS and undergo a review by the authority, they do not have to do so for bills that mature within a year.
Companies facing cash shortage problems issue bills until the moment they go bankrupt or seek court receivership. This damage is then passed on to investors.
Regarding such misuse of the corporate bill system, the FSS said it has revised related regulations since the beginning of the year, adding that it has improved the system as much as it could.
“In the Tongyang case, the bills in question were issued before May when the new rule took effect to tighten the issuance report obligation,” said an FSS official.
He said according to the strengthened rules, companies have to release their credit ratings and financial conditions when collecting more than 50 investors for a bill. “Now firms issuing bills make public their credit rating information as they do for bonds.”
However, experts said that retail investors still have difficulty in understanding such information even if it is provided accurately and in a timely manner.
“It is not easy for individual investors to analyze a company’s financial information and understand how unstable the firm is,” said researcher Kim Young-do at the Korea Institute of Finance.
He said firms should be more open with information regarding their bills and that a state-run system should collect, manage and release such information.
“Currently, when a company’s credit rating changes, there are no official channels through which investors are informed. We need to change the rules so that investors can gain better access to such information,” Kim said.