Distrust in evaluationsWhat was the purpose of the banks’ credit evaluations that assigned them grades A to D?
Workout programs are supposed to help struggling companies survive. The point is to help companies avoid further debt by lending them money and allowing them to operate their business to normalcy.
Thus, when even companies with workout credit evaluations of C go out of business, there is something very wrong with the evaluations.
Recently, two out of 13 building contractors with C grades on their second evaluation last month went bankrupt. Industry experts say that more C-grade companies are likely to go bankrupt as well. The same situation surfaced in February during the first evaluation process.
Of course, not all C-grade companies have to survive. If the cost of saving them has drastically risen compared to when they were evaluated, it is legitimate to liquidate them.
However, the recent workout cases are different. They affect companies that just had their evaluations completed only a week or so before. Either the creditors’ evaluations were inaccurate or the creditors did not support the evaluation scheme as well as they said they would.
For now, it is unclear which one of the two scenarios came into effect. However, we know for sure there is something very wrong with the creditors’ restructuring process. If the evaluations were not accurate, the problem lies in the banks’ ability to make an assessment. If the assessment was fine but the banks were unable to fully support the companies, there is a problem with their restructuring system.
If companies continue to go out of business even though creditors say they are going to save them, the level of distrust in the entire credit system will become more intense.
In the future, C grades will most probably disappear since they are held in the same regard as D grades. And if small construction companies go bankrupt even after the banks lend them money, it won’t be long before larger conglomerates and shipbuilders start to be affected.
If all goes as scheduled, the credit evaluations will be finished by the end of this month and those that get C grades will face bankruptcy. In this situation, restructuring and lending should not be left to the private sector alone.
If creditor-imposed restructuring led only by the private sector is the problem, the government should actively look into trying to help solve these recent problems.
There is a lot of talk about the weaknesses of restructuring programs, and if the distrust builds up any further, the situation will only get worse.