Digging LH out of debt

The state-run Korea Land and Housing Corp. (LH) faces serious financial trouble, because it’s buried under a staggering amount of debt.

Its 525 percent debt-to-equity ratio is the highest among the top 30 Korean conglomerates, and its debt load continues to grow.

When the Korea Housing Corp. and the Korea Land Corp. announced their merger in April last year, they had total debt of 85 trillion won ($73 billion).

Since then, the combined company has added 33 trillion won ($28 billion) more in debt; it now owes 118 trillion won ($101 billion) to lenders. If the current pace continues, its debt is expected to snowball to 200 trillion won ($171 billion) in four years.

The state-run entity must put all of its efforts into reversing this trend. To start with, LH should look to ease its financial difficulties by quitting unprofitable development projects. It also needs to downsize its staff and sell off some of its assets. In this regard, LH recently made a smart decision, announcing that it will sell off major housing projects in the private sector.

However, this is not enough to improve its financial health.

The Blue House must eventually realize that LH cannot solve its problems on its own and that the company will need help from the government. But how to assist LH is just as important. According to media reports, the government has been considering giving financial subsidies to LH. But the government should not look to help LH via financial aid at this time.

The state-run entity must first attempt to right the ship on its own, and then the government can seek institutionalized ways to support the company so that it can pursue profitability.

Financial subsidies, therefore, should be considered a last resort.

Before the government offers financial aid, it should first prepare measures that will prevent a recurrence of the same problem, which will help ensure LH doesn’t wind up in this situation again down the road.

As long as LH attempts to help itself, the government should take a big share of the responsibility in reviving the company.

The government has left several big national projects - such as the development of apartments for low-income households and Sejong City - in the hands of state-run companies. It has also contributed to the debt of state-run companies, because the government has looked to avoid taking on such debt itself.

The government, therefore, should aggressively look to prevent a future crisis of this magnitude. It should adopt measures to restructure other debt-ridden state-run companies.