Restructuring urgent for big Korean companies

Yung Chung, managing director of AlixPartners Korea

By Kim Yoo-chul

Korean companies need to put greater focus on restructuring their operations rather than striving to improve finances, said AlixPartners, a global advisory firm.

"What we call 'holistic turnarounds' ― operational as well as financial restructuring ― need to be undertaken preemptively by some Korean companies which are now being restructured such as Hanjin Group and Hyundai Group to facilitate successful corporate turnarounds," said Yung Chung, managing director at AlixPartners in Korea.

According to the executive, those troubled industries may seek to improve their financial soundness and management by implementing customized approaches.

The executive stressed that Korean companies have mostly been focusing on financial restructuring alone, along with the disposal of core assets to meet urgent cash needs, rather than on operational turnarounds.

This often results, according to his observation, in "zombie companies," which often incur huge social costs for the country later on.

Korea will see the most intensive restructuring in the year ahead among other countries in the Asia-Pacific rim as its latest findings show that the levels of corporate stress of Korean companies in those industries remains very high.

"Sentiments from survey participants regarding corporate outlooks in South Korea are pessimistic. While a small portion of respondents expect a decrease in distress within the country, the vast majority, 73 percent, anticipate an expansion in corporate restructuring in the year ahead," according to the report.

The report titled " Seize the Day: An Outlook on Turnaround and Restructuring in Asia-Pacific 2014," is based on interviews with 150 bankers, lawyers, fund managers, government officials and other restructuring experts from across the Asia-Pacific region.

In terms of debt among business groups, Hyundai had a debt ratio of 541 percent with Hanjin coming in second at 452 percent as of the end of May this year, respectively.

"Operational restructuring will continue to be essential to a successful turnaround. The importance of alleviating ongoing financial constraints, such as onerous debt loads, as well as (when appropriate) strategic management changes in companies were cited as critical factors as well," said Chung.

PEFs set to replace banks as money source

In terms of industry vulnerability, 81 percent of respondents cited financial services companies as the most in need of heavy restructuring due to a cut in commissions for online brokerages and increased fixed costs amid the continued shaky economic recovery in the West, said Chung of AlixPartners.

Amid the "restructuring frenzy" by a growing number of Korean companies, Chung said private equity funds (PEFs) are going to become the major source of funding for restructuring by companies.

"PEFs and hedge funds will benefit most amid move by companies in corporate restructurings," said the executive.

The study showed that 93 percent of respondents chose PEFs as the most-likely provider of funds.

Banks operating in Korea as well as the Asia-Pacific Rim have likely seen their influence wane, where only 38 percent of respondents cited banks as the likely primary funding source, down from 81 percent in its survey conducted last year.

"Banks that have not already scaled back will likely take a more cautious approach to lending into distressed situations going forward. This could leave ample room for PEFs to fill the void," it said.

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