FSC to weed out troubled firms in July
By Kim Tae-jong
The nations financial authorities are expected to put the largest number of companies ever under corporate restructuring program in July.
The prolonged slump has seriously deteriorated the financial health of major firms, especially in the shipbuilding, construction and shipping industries.
The Financial Service Commission (FSC) is conducting an annual inspection to weed out firms at risk of insolvency and plans to announce the list for full-scale corporate restructuring in July.
It is our annual inspection to check the financial health of firms, an FSC official said. We cant confirm how many firms will be placed on the list for restructuring at the moment.
In April, the financial regulator received lists of firms with high insolvency risks from their prime creditor banks, which were based on business performance last year.
The FSC is now more closely examining their financial health. Based on the result, it will give them four different ratings from A to D.
Companies receiving a C rating are subject to creditor-led workouts, while D-rated firms will undergo court receivership.
Last year, the FSC gave C and D ratings to some 30 companies, but this years list is expected to contain more firms as shipbuilders, shipping firms and builders have been seriously hit by the ongoing economic slump.
The Bank of Korea said Tuesday that the average ratio of operating profit to net sales dropped to 4.2 percent last year in shipbuilding firms, from 8.4 percent the previous year, and plunged to 0.1 percent from 2.0 percent in construction firms. The ratio has been in minus figures in shipping firms for the past two years.
Consequently, they are at high risk of going belly up.
According to global risk management firm KMV, the expected default frequency (EDF) stands at 9.1 percent for construction firms, 8.5 percent for shipping firms and 5.9 percent for shipbuilders.
The EDF is a measure of the probability a company will fail to make scheduled debt payments. EDF scores range from 0.02 percent, the safest credit, to 20 percent, which indicates imminent default.
In comparison, the EDF of chemical firms is 1.2 percent, 2.1 percent for machinery firms, 2.7 percent for steelmakers and 2.9 percent for electronics firms.
Many construction and shipping firms have already been placed under either debt workout programs or court receivership in recent months.
STX Offshore, the worlds fourth-largest shipbuilder, asked creditors for a debt reprieve last month to roll over maturing debts by one year to get additional loans to build ships.
LIG Engineering and Construction (E&C) has been under court receivership and Kukdong E&C has been under a debt workout programs.
After announcing the list of firms for corporate restructuring, the FSC will also review the financial soundness of small- and medium-sized enterprises (SMEs) and sort out troubled ones in November, also as part of its annual inspection.