Dongbu and Hanjin groups will be under tighter scrutiny from financial authorities as the two conglomerates show possibilities of financial troubles

2013-11-11 16:10

Dongbu, Hanjin on watch list

Regulator detects signs of financial distress at firms
By Kim Rahn
Dongbu and Hanjin groups will be under tighter scrutiny from financial authorities as the two conglomerates show possibilities of financial troubles, officials said Monday. Although the groups have struggled to solve liquidity shortages, the authorities plan to spur them on in joint efforts with creditor banks. According to the Financial Supervisory Service (FSS) Monday, Dongbu and Hanjin agreed with their creditor banks this year to improve their financial structure.Unlike other groups that formed similar agreements with their creditors such as STX, the two groups are not facing imminent cash shortages and their agreements do not necessarily require creditors-led restructuring as they have secured enough cash through asset sales since last year to pay back debts that will mature by the first half of next year.
“However, domestic and overseas economic conditions are still unfavorable to those groups. So we need to encourage them to carry out financial restructuring,” an FSS official said.
According to the group, Dongbu’s two key units, Dongbu Steel and Dongbu Corp., held bank loans of 1.3 trillion won and 2.4 trillion won, respectively, as of June.
A report by the Economic Reform Research Institute (ERRI) showed Dongbu Group’s debt ratio reached 398 percent, and the group issued corporate bonds worth 2 trillion won as of 2012, besides the loans from banks.
Last month, group Chairman Kim Jun-ki assured investors of the group’s health, saying Dongbu Steel does not have corporate bills to repay like troubled Tongyang Group had. He also said the affiliate’s high debt ratio, 270 percent, came temporarily while investing in new businesses, adding the ratio will go below 210 percent next year.
Kim said the group has been making efforts to secure liquidity. Dongbu Corp. recently sold its building in central Seoul for 300 billion won, while Dongbu Steel promised its creditors that it would secure 1 trillion won in cash by 2015 by selling its properties, including its steel mill facility in Dangjin, South Chungcheong Province.
Hanjin Group had 678 percent of debt ratio, with 6 trillion won in loans and 6.7 trillion won in corporate bonds as of 2012.
Its shipping arm, Hanjin Shipping, planned to issue 400 billion won in perpetual bonds within the year, but the scheme came to a deadlock as some creditor banks are refusing to guarantee repayment. Company President Kim Young-min tendered his resignation Monday, saying he would take responsibility for the poor financial conditions.
Amid the deadlock, another Hanjin Group affiliate, Korean Air, recently provided 150 billion won to the shipping unit. But the company is inspecting Hanjin Shipping, as it doubts whether the latter can pay back the money.
The ERRI report also said, “Korean Air’s own financial situation is not good, with the firm recording 662 trillion won in net losses in the first half of this year. The company’s money offering to Hanjin Shipping may speed up several affiliates’ joint collapse.”
The institute also called for preemptive restructuring for ailing groups. “Among five groups that showed financial difficulties in 2011, three collapsed after not making a restructuring agreement with creditors ㅡ Woongjin, STX and Tongyang,” it said.
To prevent Dongbu and Hanjin from falling into the same fate as those three groups, the authorities plan a stricter rule on their restructuring effort.
So far, creditor banks could not easily stop offering fresh liquidity to such troubled companies when the firms did not abide by the improvement agreements. “Now if companies do not follow the agreements, creditors will be allowed to demand replacement of CEOs or raise interests for the loans,” the FSS official said.
For Hanjin Shipping, the authorities recently talked with vice chiefs of banks about offering 300 billion won in short-term loans to the firm. “Shipping is one of the nation’s key industries, so we need to make Hanjin Shipping afloat again. If major creditors hesitate about the short-term loan, we’ll actively encourage them,” the official said.
Besides Dongbu and Hanjin, four conglomerates made agreement with their creditors for financial structure improvement this year ㅡ STX, Kumho, Taihan Electric Wire and Sungdong Shipbuilding & Marine Engineering.
Of them, creditors of STX, Taihan and Sungdong decided to provide fresh liquidity to them or delay payment of the debts as the firms faced imminent cash shortage. Kumho and its creditors agreed on workout programs.

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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