Debt guarantees declining

Of 63 Korean conglomerates with assets of more than 5 trillion won ($4.73 billion), the total amount of debt guarantees by 12 of them was 860 billion won as of April, down about 300 billion won compared to last year.

In Korea, the fair trade law started banning all conglomerates - both private and public companies except for financiers and insurers - from issuing debt guarantees among its own affiliates in 1998, which led to a continuous decline.

This year, debt guarantees finally dropped below the 1 trillion won mark for the first time since 1998.

According to data released by the Fair Trade Commission (FTC) yesterday, total debt guarantees were 63.5 trillion won in 1998, which declined to 2.2 trillion won in 2006, 2.9 trillion won in 2011 and 1.1 trillion won last year.

Although conglomerates are banned from debt guarantees in principle, the FTC gives exceptions in two situations. Wealthy groups can help their smaller affiliates engage in overseas projects - and conglomerates are given two years to get rid of debt guarantees when their newly acquired affiliates have some accumulated debt - or when a company is newly classified as a conglomerate.

Of all conglomerates, Hanjin Group, the mother company of Korean Air, held almost 74 percent of the nation’s total debt guarantees, accounting for about 447 billion won.

Hanjin has undertaken debt guarantees in the several trillion won range, as its affiliate Hanjin Shipping acquired several shipbuilders that were financially vulnerable. The company hopes to clear the amount by 2017.

Other than Hanjin, all companies recorded amounts of less than 100 billion won in debt guarantees, mostly due to overseas projects. Doosan Corporation had 92 billion won, Hansol 57.4 billion and E-Land 57.2 billion.

Among 63 companies, five companies - Samchully Group, Korea National Oil Corporation, Corning Precision Materials Korea, Seoul Metro and Korea District Heating Corporation - became newly classified as conglomerates this year.

The bicycle maker and city gas distributor Samchully has 29.7 billion won in guarantees. It was given two years to clear them from its books. The other four companies had no debt guarantees.

The FTC said the reduced debt guarantee amount shows that Korean corporate management has positively changed over time.

“That bad custom resulted in a chain of bankruptcies of major conglomerates,” said Shin Bong-sam, a director at FTC.

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