Banks call in short-term loans from ailing chaebol

Commercial banks have started calling in short-term loans from struggling conglomerates to accelerate corporate restructuring and maintain their own financial soundness.

According to a regulatory filing posted by the Financial Supervisory Service (FSS) on Thursday, short-term borrowings of Korean Air declined by almost 79 percent to 257 billion won ($223 million) as of the end of last year. It had borrowings of about 1.24 trillion won at the end of 2014.

Banks started calling in the loans after Korean Air injected some 220 billion won in liquidity into its suffering affiliate Hanjin Shipping. The Korea Investors Service lowered the rating on the carrier’s non-guaranteed corporate bonds from A- to BBB+ on March 30, after the liquidity injection announcement in late February.

Hanjin KAL, another affiliate of Korean Air, saw its corporate bond rating lowered from A- to BBB+. At the end of last year, it had short-term lending of about 60 billion won, far less than the 102.6 billion won of a year earlier.

Other companies in similar situations include Doosan Engineering & Construction and Hyundai Elevator, both of which have struggling affiliates.

Banks usually extend the maturity of short-term loans if the borrowers are financially sound.

The debt restructurings are in line with the financial regulator’s restructuring initiatives for insolvent “zombie” companies, and with banks’ initiatives to keep their bad debt ratios at a healthy level.

Bad debt accounted for about 1.8 percent of total debt held by local banks as of last year, the highest level since 2010, when the ratio of bad debt reached 1.9 percent, according to FSS data.

At a meeting held last week at the FSS headquarters in Yeouido, southwestern Seoul, borrower companies asked the financial watchdog and creditors to slow down the calling in of loans.

They asked creditors to extend debt maturities and delay interest rate hikes on companies that are undergoing temporary financial crunches.

FSS Gov. Zhin Woong-seob, who attended the meeting, asked bank executives to accelerate bad debt restructuring with insolvent borrowers, saying “decisive restructuring of bad debt will help creditors give financial assistance to other companies that are still possible to revive.”

BY KIM JI-YOON [kim.jiyoon@joongang.co.kr]