Gov't to apply wider scope in searching for poorly performing firms

By Nam Hyun-woo

Korea’s top financial regulator called for a wider standard in determining which companies need restructuring, Wednesday, raising expectations that more companies will receive a credit analysis.

The Financial Services Commission (FSC) announced in a press briefing that 229 firms out of some 1,900 analyzed were found to need debt-rescheduling or be put on court receivership in 2015, up from 70 in 2014, and it will increase the number of indexes to decide whether a company needs restructuring this year.

So far, the FSC only looked into a company’s operating cash flow for three consecutive years, debt ratio, interest coverage ratio and other indexes to determine if a firm is performing poorly. As part of its efforts to rein in these firms, beginning this year the regulators will look closely into whether a company faces complete capital erosion and what type of businesses it is operating.

“The purpose of raising the credit analysis standard is to distinguish companies capable of recovering financial stability on their own measures from those that cannot. It is not about killing a company,” said FSC Secretary General Kim Yong-beom. “Since many entities are involved in the restructuring process, it is time-consuming and painful.”

Kim added that regular credit analysis of large firms will be conducted in the first half of this year and the FSC will announce companies in need of restructuring in July. Small and medium-sized companies will be analyzed in the second half and the results will be announced in November.

To this separate timeframe, suspicions were raised that the FSC scheduled credit analysis on small-and medium-sized firms for after the April 13 general elections to soothe public sentiment. But Kim refuted that “that is absolutely untrue,” adding that the scheduling was made to prevent banks from suffering from excessive workload.

“Grading companies is like stigmatizing them,” FSC Corporate Restructuring Division Director Ryu Jae-hun said. “It is aimed at providing a strong warning to companies to wake up and come up with their own measures for recovery.”

The government’s new efforts, however, are facing criticisms that it is just expanding its subject of credit analysis without coming up with more accurate criteria to tell which companies are not performing well.

“Expending the subject itself will likely to find out more financially troubled companies which were omitted in previous criteria,” said Kim Mi-ae, research fellow at Korea Economic Research Institute. “However, the consideration over how accurately the government can find out ill-performing companies seems to be neglected.”

She cited a case of airlines as an example of inaccurate criteria. If an airline buys pricey airplanes through a 10-year installment plan, the carrier will have a certain amount of debt throughout the period. Then the company’s debt ratio will soar to some 800 to 900 percent, though the airliner can repay the debt by operating the airplanes.

“The increase in the number of companies stuck with poor rates in credit analysis will provide negative signals to the market, which will eventually lead investors to be more conservative,” she said.

Also, there were other criticisms that the government should have acted “more preemptively” in judging some of the shipbuilders’ chances of recovery and should have restructured them, as well as punishing those that made no efforts to recover.

“Some shipbuilders went bankrupt and others are striving for recovery,” Security General Kim said. “However, the bottom line is that the government limits its support through ‘indirect’ levels and prioritizes each company’s own effort for recovery.”