Banks set to readjust ratings on Osstem Implant over embezzlement case

Osstem Implant headquarters in Seoul / Yonhap

By Lee Min-hyung

Korean banks are considering downgrading the credit rating of Osstem Implant after the dental implant manufacturer was mired in an embezzlement scandal.

Even if the lenders that offered loans to Osstem do not have any immediate plans to retrieve their capital from the company, there stands a possibility for them to do so if the firm's rating drops.

Stock trading of the Kosdaq-listed company has been suspended since Monday after an employee surnamed Lee allegedly embezzled 188 billion won ($157 million) of corporate funds through multiple accounts.

According to data from the Financial Supervisory Service (FSS), Korean commercial and state-run lenders provided loans worth 300 billion won to Osstem as of the end of September. Woori Bank offered the highest amount of loans worth 107.3 billion won, and Korea Development Bank (KDB) came in second with 80.4 billion won. Osstem also received loans worth 25 billion won from the Export-Import Bank of Korea. Osstem paid back half of the borrowed money to Woori as of the end of 2021.

The banks said they were paying close attention to the scandal, and left open the possibility of downgrading Osstem's ratings in accordance with the investigation results.

“Even if we are watching closely how the scandal escalates, our view is that there will not be any difficulty in retrieving the loans from Osstem due to its sufficient cash flow,” an official from one of the lenders said. “If Osstem is delisted from the stock market, most banks will downgrade its credit rating and take additional actions to retrieve their loans.”

Most other lenders also shared similar sentiments. KDB said it does not have any specific plans on whether to downgrade the ratings or retrieve its capital from Osstem.

“We are keeping an eye on the situation, and no clear action plans have been confirmed internally,” an official from the state-run lender said.

Given the ongoing police investigation, FSS Governor Jeong Eun-bo declined to comment on the details, Wednesday, only saying that it would step up monitoring of the incident.

Of particular concern is that retail investors are the most likely to fall prey to the latest controversy surrounding the company.

The stock price of Osstem was on a steep rise last year. As of the last trading day of December, its shares were traded at 142,700 won. This is triple compared with the end of 2020. Osstem Implant's market capitalization reached 2.03 trillion won as of the end of last year, and this is the 23rd-largest among Kosdaq-listed firms.

The company has been suspended from trading since the first trading session of 2022.

Despite the temporary suspension, the company's stock price is widely expected to fall after trading is resuming. As of the end of the third quarter last year, some 20,000 retail investors held shares in Osstem Implant.

But Osstem Implant said the latest embezzlement scandal would not pose a serious management risk to the company, as the company generates ample cash flows.

“A considerable amount of the embezzled money is expected to be retrieved following the police investigation,” Osstem Implant CEO Um Tae-kwan said.

“Despite the accident, we do not have any problems in obtaining cash and maintaining cash flows, so our management activities will continue actively.”

He also pledged to strengthen the firm's internal control system.

“The timing of the trading resumption will be determined by the Korea Exchange,” he said. “We deeply regret the incident, and will do our utmost to bring forward the resumption of our stock trading by coming up with specific measures to prevent the recurrence of such incidents.”