Zombie Companies in South Korea Spur Restructuring Push

  • Government wants action now while interest rates are low
  • Number of companies struggling with debt payments is rising

Policy makers in Seoul are accelerating efforts to restructure debt-laden and unprofitable companies before an anticipated rise in U.S. interest rates and any further slowdown in China reverberates in South Korea.

Falling exports and huge losses among some of Korea’s corporate giants have injected urgency into efforts to sell poorly performing assets and raise competitiveness. Overseas shipments have dropped every month this year, with notable weakness in sales to China.

Government ministries, financial regulators and state-run banks have established a committee to oversee corporate restructuring while a review of credit ratings continues for large companies that are at risk of collapse. The government this month identified steel, shipping, shipbuilding, construction and petrochemicals as sectors suffering from oversupply and excessive competition.

“Back when the economy was roaring, fragile companies were able to survive if they endured just a couple years until the cycle turned for the better,” said Lee Myong Hwal, a research fellow for the Korea Institute of Finance in Seoul. “That no longer works in a low-growth era. With looming risks from China and the U.S., we may see companies that survived on debt having serious problems.”

Debt Load

One of the biggest concerns is so-called “marginal” or “zombie” companies, usually defined in Korea as businesses that haven’t been able to make payments on interest from operating profit for three years.

A prolonged period of low interest rates has led to an increase in marginal companies and there is an “urgent” need for restructuring, Bank of Korea Governor Lee Ju Yeol said this month.

Financial Services Commission Chairman Yim Jong Yong has warned that unless the problems at these companies are addressed, they will become a burden to the economy.

The number of marginal companies jumped to 3,295 last year, from 2,698 in 2009, according to the central bank. They account for 15 percent of businesses with more than 10 billion won ($8.6 million) of assets.

Among Korea’s 500 biggest companies by sales, 85 were unable to pay interest with operating profits last year, according to CEOSCORE, a local research company analyzing corporate data.

The financial regulator is asking creditor banks to talk with owners of the conglomerates, not just executives at individual business, to prevent delays in restructuring, the Seoul Economic Daily reported Tuesday.

Strong Points

Overall, the South Korean economy remains relatively strong and growth is expected to improve next year and remain comfortably higher than the U.S., Germany and Japan. If the current recovery momentum continues, gross domestic product is likely to expand by 3 percent in 2016, Finance Minister Choi Kyung Hwan said on Nov. 20.

Some companies are moving swiftly to address problems and to concentrate on their traditional strengths.

Posco in July pledged to "aggressively” leave non-core businesses to focus on its steel operations after its earnings suffered as oversupply from Chinese competitors pushed down world prices. Moody’s Investors Service said last month the outlook for Posco’s Baa2 debt rating remained stable.

The Financial Services Commission has noted that companies in the steel industry are aware of oversupply problems and said the government will keep working with them to streamline investments.

Shipbuilder Losses

South Korea is home to the world’s three biggest shipbuilders and quarterly losses at the trio shone the spotlight on companies with problems.

Daewoo Shipbuilding & Marine Engineering Co., which plans to sell non-core assets and shed workers, will receive $4.2 trillion won ($3.6 billion) from its creditor banks.

Overseas sales of ships, which accounted for about 7 percent of the nation’s exports in 2015, fell by 5.3 percent in the 10 months through October from a year earlier, data from the trade ministry show.

South Korea will finish its credit-rating review of major companies within the year to ensure restructuring takes place, Choi said on Nov. 19.

Expanded Role

The government has also expanded the role of Uamco Ltd., a buyer of bad debt, so that it can create a fund and purchase ailing companies. Uamco will find its first target this month.

The government emphasizes that companies and creditor banks should enter into “voluntary restructuring,” while the it offers broad guidelines to facilitate the process.

“Korea’s economy may deteriorate further from here so companies need to prepare preemptively before it’s too late,” said Ryu Jae Hun, a director for the Financial Services Commission. “Creditor banks tend to want to keep companies alive so that losses don’t mount on the banks’ books. This is why the government is pushing them to act, voluntarily.”

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