The Ice Just Keeps Getting Thinner In South Korea

More Korean companies fall, paying the price for steep debt

These are desperate days in South Korea. In an unprecedented move, Ssangyong group, Korea's sixth-biggest chaebol, or conglomerate, is looking for foreign buyers for half its carmaking unit, Ssangyong Motor. In last place among Korean auto makers, it has been in the red since 1992 and has debt of more than $3 billion. So Ssangyong has been trying to lure General Motors Corp. to buy in. And it wants Daimler Benz, which already owns 3%, to increase its share. But insiders say neither Western carmaker is inclined to take the plunge.

Ssangyong is indicative of the disease afflicting Korea's companies: perilously high debt-to-equity ratios caused by borrowing too much too quickly to finance growth (table). Most companies' debt is nearly three times their equity, and for some outfits it's more than 10 times. In the past, speedy sales growth covered excesses. But as Korea's economy slows, the bankruptcies this year of two major chaebol have raised the specter of more failures--and it's smaller companies that are most likely to suffer.

BRIBERY. The bankruptcies have chastened Korean bankers and bureaucrats, who have responded by tightening credit and slowing growth in government spending. That, in turn, is likely to trigger even more failures. But it will also accelerate the badly needed process of industrial restructuring. "These incidents have given companies a good lesson that there's a great risk in borrowing too much," says Han Seung Soo, who stepped down as Finance Minister in early March.

The repercussions of a bribery scandal following the collapse of the Hanbo group in January and the Sammi group in March are extending through politics, threatening to bring down President Kim Young Sam himself. They're also reaching bankers, who are suspected of colluding to extend billions in unsound loans. So there's a backlash against lending. "Bankers are now dead set against making loans under political pressure," says Kim Hun Soo, Merrill Lynch & Co.'s research head in Seoul. "They can resist by saying, `We almost went kaput because of you guys."'

Such attitudes are especially hard on small outfits. Unlike the chaebol, these companies lack collateral and access to global capital markets. The default rate is rising. In March, an average of 24 companies folded every day in the Seoul area alone, compared with 15 a day last year. "How many companies will go bust is hard to say," said Lee Keun Mo, head of research at ING Barings Securities Ltd. in Seoul. "But firms with poor cash flow and with debt-equity ratios in excess of 10 will suffer."

GETTING SERIOUS. Despite the warnings last year of grave problems to come, the first shocks hit only this year when the two chaebol collapsed. Hanbo, Korea's 14th-biggest conglomerate and its No.2 steelmaker, had $5.8 billion in debt. The Sammi group, Korea's 26th-biggest chaebol, cracked under debt of $2.2 billion. Like Hanbo, Sammi overreached itself. In the late 1980s, the company vaulted into the top ranks of world specialty steel makers by spending $300 million to buy Atlas Corp. of Canada and Al-Tech Corp. of the U.S. Soon afterward, the market slumped. To keep the group afloat, 7 of 12 affiliates were subsequently sold. But that was not enough.

The demise of further chaebol cannot be ruled out. Analysts say that such second-tier conglomerates as the Doosan group are vulnerable. Doosan owns Oriental Brewery, a leading beer company with a debt-equity ratio of 10.7.

The country's steps toward fiscal austerity show it is serious about reforming the industrial structure. Seoul has even cut its growth estimate for this year to 5.3% from the 6% rate forecast earlier. That's down sharply from last year's 7.1%. But with so many companies still highly leveraged, the carnage is expected to continue.

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