Is the government taking a hard enough line with indebted conglomerates?
ON THE face of things, the restructuring of South Korea’s heavily indebted family-owned conglomerates (chaebol) is proceeding apace. On June 28th the eighth-biggest, Kumho Asiana, said it would sell its one-third stake in Daewoo Engineering & Construction, one of its biggest units. Past governments have coddled chaebol, but the current one says free-market principles should prevail. Regulators say that they have been urging banks to take a hard line with nine struggling chaebol, including Kumho Asiana.
In addition to Daewoo, Kumho Asiana owns Asiana, the country’s second-biggest airline, and petrochemical, tire, life-insurance, resort and transport businesses. As with other chaebol, descendants of the founder still control the business.
In 2008 it used its airline and Daewoo to become the biggest shareholder in South Korea’s biggest logistics company, Korea Express. That acquisition, along with the purchase of Daewoo in 2006, has left it with debt of 15 trillion won ($11.8 billion). Moreover, the 18 South Korean banks and other investors that had bought almost 40% of Daewoo alongside Kumho Asiana are likely to exercise an option in December to sell the conglomerate their shares at a price of 31,500 won—over three times the level of June 26th. So Kumho Asiana needs to find another 4 trillion won.
The likely buyer of Daewoo is the state-owned Korea Development Bank. It has said it will create a special private-equity vehicle to that end. Several weeks ago it offered to buy Kumho Asiana’s holding at a 30% premium to the market price. That would still leave Kumho Asiana about 1.7 trillion won short of its obligations under the put option, according to CLSA, a broker.
Korea Development Bank has also said that it will give Kumho Asiana the “right of first refusal” if it decides to sell the Daewoo stake. This idea has Seoul’s financiers fuming. They do not see why the bank should be doing Kumho Asiana any favours. In its current form, they argue, its offer to buy the shares amounts to a bail-out. They note that Korea Development Bank is also in negotiations to buy a unit of Dongbu group, another indebted chaebol. They worry that the lender will end up impeding genuine restructuring.
But for all its talk of free markets, the government does not want any big chaebol to go bust. It is haunted by memories of the Asian financial crisis of 1997-98, when high corporate debt helped to sap investor confidence and spark a run on the won.
The irony is that most South Korean firms are in much better shape these days. They have cut their debt dramatically since the crisis and keep far more cash on hand. In December 1997 the average debt-to-equity ratio of firms listed on Seoul’s stock exchange was 425%; in May this year it was 130%. Their cash reserves have risen from 10 trillion won in late 1999 to 78 trillion won at the beginning of this year. There are clearly plenty of South Koreans who have warmly embraced restructuring.