Synopsis on the Progress of Structural Reforms in Korea
Part I Financial
non-viable banks (as of December 1998)
- 5 commercial banks were closed and
their businesses were transferred to other banks;
- 2 major commercial banks are on sale
to foreign investors (Korea First Bank and Seoul Bank). Negotiation is
- 16 merchant banks were closed;
- 1 Investment Trust Companies was
closed and another is under suspension of operation;
- 2 Securities Companies closed and 4
are under suspension of operation
- 4 Insurance companies were closed.
- 18 mutual savings and finance
companies were closed and 9 are under suspension of operation.
Banks are required to improve
capital ratios to
- 6 percent by March 1999,
- 8 percent by March 2000;
- 10 percent by December 2000;
- Lower ratio of 4% for local banks
- Currently the ratio for most of the
banks is higher than 10% largely owing to recapitalization of 14 trillion won
by the government and 2 trillion won by banks themselves.
At the end of March 1998, non
performing assets held by banks and non-bank institutions, defined as loans
over due more than three months, was estimated at 112 trillion won, or 14.5% of
total loans of all financial institutions .
The latest estimate in December 1998
was 60.2 trillion or 10.5% of the total loans. The sharp decrease owes to some
extent to write off, but mainly to purchase of the NPLs valued at 44 trillion
won by the Korea Asset Management Corporation which was set up to help resolve
NPLs by means of government funding.
- The government authorized issues of
bonds for 64 trillion won for purchase of NPLs, recapitalization of financial
institutions and compensation for the default deposit with the financial institutions
- The NPLs currently held by banks (more
than 60 trillion won) are expected to be resolved mainly by the banks
Legal measures which have been
Strengthening disclosure system
- Prudential regulation for foreign
exposure and liquidity management.( July 1998)
- Strengthening asset classification
standards and provisioning requirements. (July 1998)
- Introduction of Corrective Action
Regulation of excess credit (January,
- Strengthening of accountable
- Improving deposit guarantee
Participation (as of May 20)
Amount of Investment
Equity Share (%)
Korea Foreign Exchange Bank
to increase to 29.8%
- Number of banks were reduced from 27
to 17 by closure and merger.
- Man power was cut by 34 %, saving 1.3
trillion in a year.
- Operating profit rose by 57% in 1998
largely due to the wider margin between interest rates of deposit and loans and
to economizing of expenses.
- More healthy and sound banking
practices seems to be developing.
Part II Corporate
Restructuring -for the Top Five
- To stabilize financial system by
preventing build-up of additional bad loans, the government undertook to speed
up exit of non-viable corporates, and revitalize potentially viable corporate
by means of “workout” process. But the government went further to coordinate
specialized fields of production of the Top Five chaebols with a view to
eliminate over-production stemming from overlapping investment in the past.
- Naturally corporate restructuring is
focused on the Top Five Chaebol: Hyundai, Samsung, Daiwoo, LG, and SK.
- On January 13, 1998, then President-elect
Kim Dae-Jung together with the five chaebol owners announced the implementation
of five major task for corporate restructuring:
- Enhancement of management transparency
- Elimination of cross guarantees
- Improvement of capital structure
- Selection of core competence
- Strengthening of accountability of major shareholders and management.
- The latest version of the Agreement
include the following financial restructuring plans:
Hyundae: Number of affiliate companies
will be reduced from the current 79 to 26 by the end of 1999.Debt-Equity ratio
will be reduced to 199.1% during 1999 through self- financing of 16.2 trillion
- Daiwoo: Number of affiliate companies
will be reduced from 36 at the end
of Nov. 1998 to 9 by the end of
1999. Debt-Equity ratio will be
reduced to 181.8% during 1999, which will need self-financing of 14.6
- Samsung: Number of affiliate companies
will be reduced from 66 at the end of Nov. 1998 to 40 by the end of 1999.
Debt-Equity ratio will be reduced to 193.5% through self-financing of 5.8
- LG : Number of affiliates will be reduced from 53 at the end of
Nov. 1998 to 38 by the end of 1999. Debt-Equity ratio will be reduced to 199%
through self- financing of 8.7 trillion won .
- SK: Number of affiliates will go down
from 49 at the end of Nov. 1998 to 22 by the year 2002. Debt-Equity ratio will
reach 199% during 1999 through
self-financing of 3.4 trillion won.
- Under the agreement the Top Five vowed
to reduce debt equity ratio from the average of 672.3% at the end of 1997 to 200%
by the end of 1999. The ratio actually fell only to 449.3% by the end of 1998.
It is to be seen, whether the final target will be met in the current year.
- Between Dec. 1997 and March 1999,
recapitalization amounted to 12.57 trillion won, compared with
15.75 trillion won indicated in the plan agreed with credit banks.
Reduction of Cross
- The Top Five agreed with the banks to
clear off 28 trillion won of mutually guaranteed loans by the end of 1999. This
plan called for downsizing number of affiliated companies within the Top Five
from 283 at the end of 1998 to 135 by the end of 1999. Up to March this year 57
affiliates were reported to have been divested, reducing the cross guaranteed
loans by 27 trillion won.
- The restructuring plan called the Top
Five for introducing foreign capital by means of selling physical assets as
well as financial assets such as stocks and securities. The planned amount for
1998 –99 was $ 24.3 billion. Up to March this year, only $3.8 billion was introduced.
- Chaebols are required to produce
consolidated financial statements beginning in 1999;
- Information disclosure standards are
- The minimum representation requirement
for class action suits was reduced to 0.01% from 1% of outstanding shares.
- All listed companies are required to
appoint outside directors.
- A formal committee for the selection
of auditors is to be set up.
- The de facto director system and a
cumulative voting system was introduced.
- Institutional investors will be
allowed to exercise their voting rights to monitor management practices and
- The degree of conformity of Chaebol
with these requirement is generally favorable.
- “Capital Structure Improvement Plan”
agreed between creditor banks and Chaebol in Feb. 1998, required of Chaebol to
identify its core business, and non-core affiliates were to be relinquished
through various means, including spin-off, liquidation, selling off to
employees and others.
As part of
restructuring efforts, the Top Five, at the behest of the government, announced on September 3, 1998 that
they would restructure seven business segments. Major contents of announcements
and the progress so far made to that end can be summarized as follows.
- Petrochemicals: the enterprises of
Hyundae and Samsung was to be merged into a new corporate entity. On April 22,
the two parties agreed on the method of assessing real value of the enterprises
on both sides. They are yet to workout and agree as to how differential in the
value of the two enterprises should be treated and how excess capacity would be removed.
- Aerospace: The enterprises of Samsung
and Hyundae was to be merged into a new corporation. Assessment of the value of
the enterprises on both side was completed in May 1999, and a new corporation
is scheduled to start in June.
- Train car manufacturing : Hanjin and
Ddaewoo affiliates were to be merged.
On May 3, 1999, the both parties agreed to set up a corporation as a
joint venture to be inaugurated in June.
- Vessel engines and power plant equipment:
The business of Samsung and Hyundae was to be transferred to Korea Heavy
Industry Co. The parties agreed that following the assessment of the properties
involved, the transfer contract would be signed in no later than May 1999. The
outcome is unknown.
- Semi-conductor: merger of LG and
Hyundai. On April 22, the both parties agreed on the value of equity holding to
be transferred from LG to Hyundae. All of transfer procedures was to be
completed by June 30, 1999.
- Oil refinery: Hyundai was to take over
Hanwha ’s business. On April 2, 1999, the transfer contract was signed.
- Swap between Samsung’s automobile and Daewoo’s electronics. Negotiation is still going on. There is a report that Daewoo has
decided to withhold electronic business. In Samgsung automobile case, the
resolution of the accumulated loss is a key issue. It was reported that Samsung’
affiliates may extend loans with concessional interest rate to the motor
company and even private donation of K.H. Lee, the owner of chaebol, was said
under consideration. At any rate,
this is one of the most complicated and difficult deal involving not only the
two chaebols, but also a host of small companies depending on the Samsung
mortor plant and labor union involved.
Work Out for
large-sized corporates other than the Top Five
- Work out is a process of voluntary
negotiation between creditor banks and corporates to develop recovery plans of
those companies which are currently in financial distress but deemed
- The workout measures vary depending on
the status of individual companies. Usually it involves selling off affiliate
companies; sale of real estate, surrender of management and ownership by the
original owner; donation of the owner’s personal properties to the corporate;
reduction of capital. Conditional upon these self-help measures taken, creditor
banks will provide fresh loans, debt-equity conversion, grace period of a
certain amount of loans, and lower interest rate.
- Originally, 55 out of 313 corporates
reviewed by the credit banks were classified as qualified for workout on June
18, 1998. Currently, 81 companies, including 42 affiliates of the top 16
chaebols (other than the Top Five), are under the workout process, (as of March 1999) .
- According to the Financial Supervisory
Committee (FSC), 76 companies(out of 81)
so far have completed negotiation with credit banks on the workout
as of May 1999. The 76 companies consist of 38 companies belonging to the top
16 chaebols and 38 large-sized but
non-chaebol companies. .
- According to the plans, the top 16
conglomerates are required to sell off or liquidate 196 companies out of
existing 248 affiliates and only remaining 38 are taken up for work out, while
14 are for self restructuring.
- If a company under workout agreement
fails to comply with the agreement with the credit banks, banks may take
compulsory actions such as discontinuing lending and withdrawing existing loans
from the company in question.
Rehabilitation of Small and Medium Enterprises
- In order to rescue small businesses
hard hit by the IMF measures, “Special Task Force for SEMs” was set up in each
bank in May 1998. The task forces reviewed 37,449 SEMs (almost all existing
companies) and classified them into 3 categories in terms of the level of
support required: priory support (39.1%); conditional support (55.4%) and
- Various support measures were
introduced according to “SME Workout Guide Lines” handed down by the government
- including unconditional roll over of loans maturing throughout 1998;
providing fresh loans; expanding credit guarantee facility, easier access to
trade finance. etc.
- In the area of financial restructuring
a commendable progress has been made in the past 16 months in that non-viable
financial institutions have been closed down; capital adequacy ratio has been
met; non-peforming loans have been reduced; institutional remedy has been
introduced to improve disclosure, transparency, accountability and efficiency
of the bank management. Systems of prudential regulation and corrective action
were also introduced. However, the financial institutions still hold NPLs
totalling 60 trillion won which needs to be cleared as speedily as possible.
- In the area of corporate restructuring
substantial progress has been made in the reduction of debt-equity ratio,
reduction of cross guarantees, and enhancing disclosure and transparency,
although acquisition of foreign capital far lagged behind the target.
- Yet, in the particular areas of Big
Deal of the Top Five chaebol and work out of large sized corporates many things
remain to be done.
- So far no big deal for the Top Five is
complete except for semi-conductor and oil refinery.
- It was reported in a news paper that
some 20 companies which underwent workout process failed to recover, calling
for an additional workout.
- The government is unhappy about
procrastination on the part of the Top Five, and repeatedly gave warning that
it might take a compulsory action. However, there are good reasons why
corporate restructuring is delayed. Among others,
- Creditor banks have to go through a
time consuming process to resolve differences among themselves, to consult with
borrowers, to review business prospects, and conduct due diligence etc.
- It is extremely difficult for chaebols
to find buyers of their assets under the current circumstances, and selling of
assets involves a time consuming process of negotiation with potential buyer or
- Stakeholders, labor unions are
formidable force obstructing selling of business units.
- The government is arguing that it has
merely be exercising the power of prudential regulation of the banking system
and refraining, in respect of market principle, from direct intervention with
private business in the course of corporate restructuring. Chaebol in reality
has been subject to jawboning of the government. In Korean context, they were
not in the position in which they could express themselves even if they find the
conditions of agreement was not realistic and acceptable. The result is that
chaebols are not willing to exert voluntary effort to speed up restructuring.
- Corporate restructuring by its nature
is bound to be time consuming. It seems to be unrealistic to expect to complete
corporate restructuring in a matter of less than two years. It seems more
important to carry out reforms in a steady manner in line with the goal of the
reform and market principle and in a way to assure lasting effect rather than
making haste merely to boast an apparent achievement of the government.
- The efficacy of the high handed
government approach to corporate
restructuring is challenged by observers at home and abroad. Certainly
Korean experience provides much for thought and study in the days ahead. At any rate one thing is certain that
corporate culture in Korea will undergo a drastic change and uncertainty will
hover around major players of Korean economy, and it will take several more
years before business community settles down on the basis of a new economic
order, and Korean economy starts to regain vitality. The End.