FSC on Tongyang damage control

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FSC on Tongyang damage control

While the debt crisis involving Tongyang Group shows no signs of being resolved anytime soon, the focus is now on whether there are more financially pressed conglomerates and whether the financial regulator can prevent a repeat of what happened with the nation’s 38th-largest conglomerate.

As for now, the government has calmed market concerns over rumors that several other companies are under financial pressure, noting they have been overblown.

“I think there is an exaggeration in the market [over concerns that there are other groups at risk besides Tongyang Group],” Shin Je-yoon, chairman of the Financial Services Commission, told reporters on Thursday. “We are currently monitoring the overall situation closely and there have been no movements spotted other than Tongyang Group.”

Shin’s comments come as concerns grew last week during a parliamentary audit of the Financial Supervisory Service when Gov. Choi Soo-hyun remarked to lawmakers that four other conglomerates manage their own securities affiliates and secure business funds by having them sell corporate bonds and commercial paper.

Choi, however, said that doesn’t necessarily mean the four securities affiliates are selling junk-rated commercial paper and corporate bonds like Tongyang Securities did.

“I cannot reveal the list,” he said.

The Tongyang Group debacle surfaced in late September when the conglomerate failed to secure enough liquidity to pay back its due debts and filed for court receivership for five affiliates.

The move left almost 50,000 individuals who invested in the corporate bonds and commercial paper of Tongyang Group affiliates through Tongyang Securities at risk of losing a total of more than 2 trillion won (1.9 billion).

The brokerage firm is reportedly known to have sold investments to retail investors without providing sufficient information about the risks involved in the high-interest bonds, and some malpractice is known to have taken place in the sales process. This has sparked criticism of the FSS for not properly monitoring Tongyang Securities.

“There are two major issues involved in this crisis,” said an industry official. “First is how victims are going to be saved from seeing massive losses in their investments, and the second is whether or not there are other groups like Tongyang that could crumble and affect investors.”

The official noted that the financial regulator’s priority now should be preventing other conglomerates from failing like Tongyang Group.

During the parliamentary audit, FSS Gov. Choi noted the regulator is looking into the four conglomerates and their sales of corporate bonds and commercial paper to determine if there are any risks involved.

Starting Thursday, the FSC prohibited securities firms from selling affiliates’ corporate bonds rated BB+ or lower to individuals. However, industry sources note that Dongbu Securities, Eugene Investment and Securities and SK Securities would be affected by the change if the credit ratings of their affiliates’ bonds drop a level.

Dongbu Group Chairman Kim Jun-ki on Sunday rolled up his sleeves to personally assure investors that the enormous debt the group currently bears, which could bring down its credit rating, is not the same as that of Tongyang Group.

At the conglomerate’s executive meeting at Dongbu Steel’s plant in Dangjin, South Chungcheong, last week, the chairman stressed that although Dongbu Steel’s debt-to-asset ratio exceeds 270 percent, it was largely because of investments poured into new businesses.

“It is only temporary, and we are not at a level where we need to be concerned,” Kim said.

He went to say it was regrettable that false or distorted information is being spread about Dongbu Steel, the group’s core affiliate.

“Under such a severe economic slump, other than the top few, how many businesses do you think would have a surefire cash cow?” Kim asked. “The debt structure of Dongbu Steel is highly normal, since 76 percent is borrowed from financial institutions like banks and 24 percent is corporate bonds There is no commercial paper.”

Industry officials note unnecessary worries are being created in the market that are also stirring fear among investors.

Last Monday, LIG Investment and Securities released a report claiming Dongbu Group’s debt structure was similar to that of the troubled Tongyang Group. Two days later, the report was corrected.

The revised report stated that to claim the fiscal structure between Dongbu and Tongyang was similar was inappropriate.

“We expect market insecurity will be eased since the owner, who has the best insight on the company’s fiscal state and management direction, has explained the current status quo as well as its vision thoroughly,” said a Dongbu Group official.

BY LEE EUN-JOO, LEE HO-JEONG [angie@joongang.co.kr]
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