Banks to Step Up Corporate Restructuring
By Kim Jae-kyoung
Staff Reporter
Korean lenders are stepping up their efforts to weed out nonviable companies by widening the scope of their corporate overhaul in a bid to prevent massive bankruptcies of ailing firms.
According to industry sources, local banks plan to expand their corporate restructuring into every industrial sector, from shipbuilding to construction.
To that end, they plan to begin reviewing credit risks of companies that owe over five billion won ($3.63 million) to creditors starting March, once their 2008 financial statements are released.
First of all, they plan to look into firms' interest coverage ratios and asset soundness by the end of April and carry out evaluations on business outlook, management risk and industry outlook in May.
Then they will examine those with interest coverage ratios of less than 100 percent, those rated as ``cautious or below'' and firms with ``negative'' reviews from external audits. Interest coverage ratios are a gauge of a company's ability to pay out interest with operating profit.
According to a survey of 1,149 manufacturers conducted by Bank of Korea (BOK), those with interest coverage ratios of less than 100 percent, meaning that they are unable to pay out interest with operating profit, reached 36.5 percent in September, up 6 percentage points from a year ago.
``Banks are evaluating ailing companies with credit ratings that suddenly fall on a real time basis,'' a local bank official said. ``The upcoming credit assessment will be based on 2008 financial statements and companies in all industries are subject to the evaluation.''
Given that the economic downturn has been deeper and faster than expected, the move is expected to have more companies undergo corporate restructuring.
The move came as financial soundness at many companies is deteriorating at a rapid pace due to worsening earnings caused by the deepening economic downturn.
With the global recession taking a toll in exports and consumption, there are brewing concerns that even large local firms, including Samsung Electronics, will suffer losses in the first half of this year.
According to FnGuide, a firm specializing in the financial analysis of local companies, 224 major listed firms are forecast to post combined operating profit of 36 trillion won in the first half, down 31.8 percent from a year ago.
Their combined net profits are also expected to drop by 27.2 percent to 27.2 trillion won.
By company, Samsung Electronics is forecast to record 2.3 trillion won in operating losses, while LG Display and KEPCO are likely to suffer operating losses of 7.1 trillion won and 8.2 trillion won, respectively.
Last week, local banks decided to end the support to two ailing companies and have 14 builders and shipbuilders facing a liquidity squeeze amid the slowing economy undergo a debt rescheduling program.
However, local banks have been under criticism for balking at restructuring troubled companies on fears that drastic restructuring will further hurt their balance sheets.