Emergency loans for sick companies

Global Finance, May 1998 by Hanes, Kathryn

Against all odds, South Korea's sickliest companies are existing on emergency loans at reduced rates. Critics say such bailouts delay the kinds of fundamental shake-ups that would restore investor confidence. "They are stopgap measures," says an ABNAMRO analyst in Seoul. "They delay rather than prevent bankruptcies, and they perpetuate the economy's problems."

About a quarter of the country's top companies went bust last year when the annual interest rate hit 12%. Yet none has gone bankrupt in 1998 despite interest rates that have doubled and with money more scarce than ever. What has happened is Korea's thinly veiled secret: In order to shelter its international reputation from more corporate casualties, the government is pressuring the banks to rescue companies on the brink.

Financially battered (but not bankrupt) companies receive emergency loans at about half the interest rates offered to "ordinary companies." Since January, analysts say, banks have injected some 2 trillion won ($1.3 billion) into chaebol at the behest of the government. "The loans violate free market principles," fumes a Seoul-based analyst. "A subsidy for troubled companies could ultimately damage even profitable companies." Among the corporations receiving emergency loans this year are Kohap, Hanil Synthetic Fiber, Hai Tai, and New Core.

No one doubts the dire situation at Korea's companies. The Korea Development Institute projects corporate interest payments at 180-200 trillion won this year-or almost three times the country's annual budget.

But critics argue that the chances of a turnaround for these companies are slim. Debt at the ninth-largest chaebol, the Hanwha Group, amounts to 9 trillion won, about seven times its equity. Hanwha recently sold two subsidiaries to foreign companies and is negotiating with Western oil companies to sell its refinery. But analysts say the company's petrochemicals unit alone would sink Hanwha in a different country. Instead, the chaebol lumbers on under the steam of 740 billion won in emergency bank loans secured over the first three months of 1998. Its 17% interest rate is 9 percentage points lower than the going market rate in March.

South Korea's banks, hostage to billions of dollars in bad loans to eight chaebol that failed last year, are hardly doing better than the corporations they must subsidize. Most recently the government intervened to prevent two top commercial banks, Seoul Bank and Korea First Bank, from going belly-up.

Foreign creditors appear as reluctant as the government to write off bad loans. In mid-March international creditors agreed to extend $21.37 billion of shortterm debt owed by South Korean financial institutions for up to three years in return for a government guarantee.

Finance minister Lee Kyu-sung recently proposed that Korea allow hostile foreign acquisitions. The surprise suggestion came in the wake of a study by Lee's ministry, which estimates Korea needs to attract at least $70 billion in foreign currency holdings this year. In a report to President Kim Dae-jung, the finance ministry says changes to the takeover code could help attract $1 billion in foreign money. In response, Kim has ordered the ministry to consider scrapping restrictions on foreign investment, land acquisition, and stock purchases.

Meanwhile, the government has reiterated its mission to prevent further bankruptcies. In March deputy finance minister Chung Duck-koo sought the International Monetary Fund's approval to lower interest rates that are causing a liquidity squeeze among many corporations.

The IMF demanded bankruptcy in return for its $60 billion bailout package last winter. Without bankruptcies, the IMF reasoned, the country's industrial overcapacity would not be resolved. By postponing bankruptcies, analysts say the government is losing the confidence of international investors it so desperately needs. -Kathryn Hanes