Gov’t tries to get serious about ‘zombie’ firms

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Gov’t tries to get serious about ‘zombie’ firms

Restructuring of so-called “zombie” companies will kick into full swing, with both creditor banks and the government working on guidelines for credit reviews and risk assessments of the firms, the Financial Services Commission (FSC) said on Tuesday.

The FSC said a consultative body led by the FSC chairman and comprising major government entities, including the Ministry of Strategy and Finance and the Ministry of Trade, Industry and Energy, will form an organization to oversee the corporate restructuring.

A separate task force consisting of banks will be set up to tighten credit review standards and select companies in need of restructuring, it said.

Creditor banks will have until the end of this year to review the financial health of major conglomerates and come up with a list of companies that are in need of overhauls.

Given the impact it will have on the Korean economy, restructuring of the so-called zombie companies - companies that survive on loans, especially during a time of low interest rates, and which have little chance of being turned around - will be overseen by the FSC-led government consultative body, the top financial regulator said.

“We have decided to set up the government consultative body because it’s not easy for individual creditor banks to restructure infrastructure-related companies and conglomerates, given their impact on the overall economy,” said Koh Seung-beom, a senior official with the FSC.

“When restructuring conglomerates, there are a lot of implications for regional economies and affiliated companies, so it is not easy for banks to implement overhauls.”

Conglomerates with outstanding debt of 50 billion won ($44 million) or higher will undergo credit reviews from November to December.

Due to mounting external risks, including the Chinese economic slowdown and a forthcoming U.S. interest rate hike, the government is likely to adopt more strenuous standards, the FSC said.

Once a company is considered a restructuring candidate, it will be rated B, C or D. A B-rated company will be allowed additional funding. Companies with C and D ratings will undergo debt workout programs, go into court receivership or face bankruptcy.

Small and medium-sized companies will also be more closely monitored. Companies that are seeing negative cash flows and failing to pay interest on loans for the past two years will be reviewed, the FSC said.

The number of SMEs that fall in the review category has increased by 325 in 12 months to reach 1,934.

The FSC said it will also strengthen its oversight of creditors, looking closely at the size of banks’ allowances for bad debts and their dealings with financially troubled companies.

“We will differentiate the firms in need of restructuring from those that are in temporary financial trouble,” the FSC said.

“We will not take umbrellas away from companies that are merely experiencing rainy spells.”

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