Chaebol failures spark rise in bad loans

October 13, 2013 11:07 am

Chaebol failures spark rise in bad loans

By Song Jung-a in Seoul

A string of bankruptcies in South Korea has prompted concerns that the country, already saddled with high levels of household debt, now faces the added challenge of dealing with a similar problem within its companies. The spike in failures among second-tier chaebol, particularly in cyclically weak sectors such as construction, shipping and shipbuilding, partly reflects the domestic nature of their business: for every Samsung Electronics selling sleek smartphones and snappy tablets across the world, there are many more Korean companies reliant almost wholly on the sluggish home market.It is also a legacy of the policies of former President Lee Myung-bak, whose generous support to the corporate sector after the 2008 collapse of Lehman Brothers left a raft of zombie companies entirely dependent on infusions of state cash.

The cost of that policy is now being seen in the likes ofSTX Corp, once one of the world’s leading shipping and shipbuilding groups; cement-to-financial services conglomerate TongyangKumho Industrial, the building arm of Kumho Asiana Group; Ssangyong Engineering & Construction; and chemicals and energy group Woongjin – all of which have ended up either in bankruptcy courts or under creditor-led debt workout programmes.

“The second-tier chaebol groups . . . managed to survive the global financial crisis thanks to generous state support,” says Kim Sang-jo, economics professor at Hansung University; but some now “have reached the limit as a result of delayed restructuring”.

Retail investors, who bought up Tongyang’s short-term debt in their quest for higher yields, have been left holding a mountain of worthless paper after five units of the country’s 38th-largest conglomerate filed for court receivership last week. Out-of-pocket investors are now agitating for greater supervision of troubled companies.

Tongyang and its four affiliates have relied on short-term borrowing to stay afloat, selling Won1.5tn ($1.4bn) worth of corporate bonds and commercial paper to retail investors this year. Tongyang alone issued Won872.5bn of corporate debt despite having gross debt worth 650 per cent of its equity at the end of June.

“Many of the recently failed companies are those relying on domestic spending,” says Kwon Young-sun, economist at Nomura. “While Samsung Electronics and Hyundai Motor are doing well, thanks to strong exports, other companies focused on the domestic market have come under growing pressure amid sluggish domestic consumption.”

The bankruptcies have caused a rise in bad loans, especially at state-run banks including Korea Development Bank – which analysts expect to swing to a net loss for this year – and Woori Bank. According to Fitch, the banking-sector ratio of loans that already are non-performing or could go sour stood at 4 per cent of total loans as of end-June, up from 1.7 per cent at the end of 2007.


However, regulators say that there is no systemic risk, citing local banks’ relatively limited exposure to the troubled companies and their expanded loan loss provisions.

Still, economists reckon the growing corporate debt pile could pose a bigger threat to economic stability than high household indebtedness, which is already viewed as a time bomb with the potential to derail Korea’s economic recovery.

“I see more possible corporate failures around the corner with some of the chaebol groups like Hanjin, Dongbu and Hyundai already missing the right timing for restructuring,” says Prof Kim at Hansung University. “If the authorities fail to address the problems properly, investors could lose confidence in the economy, making it vulnerable to an external shock.”

Mindful of such criticism, authorities are now considering revising regulations to allow greater creditor supervision of weak companies, even if their direct exposure to such groups is limited.

Analysts say South Korean banks can cope with the recent series of corporate failures given their high capital adequacy ratios, but they caution that earnings will inevitably take a hit.

“The business cycles of such sectors as construction, shipping and shipbuilding are unlikely to improve any time soon, which would continue to put pressure on credit costs and asset quality of local banks,” says Chang Hye-kyu, analyst at Fitch Ratings.

Given the investor backlash, Mr Kwon at Nomura is optimistic that Tongyang’s failure could help speed restructuring of other ailing companies still trying to raise much-needed cash via debt markets.

“Uncompetitive companies should be restructured so that financial resources can be used for more productive areas,” he says.

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 (, 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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