The sword fight begins

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The sword fight begins

If corporate restructuring is likened to a sword fight, the first move should be studying one’s surroundings in meticulous detail. One must know exactly where the opponent’s sword is headed. Falling for feigned action or trickery is not worthy of a master in swordsmanship.

One must train rigorously and be prepared to bleed when confronted with a stronger opponent. Bleeding does not necessarily mean losing.
Financial Services Commission Chairman Yim Jong-yong, who is commanding the corporate restructuring campaign, should be aware of five challenges and be fully prepared before entering this battle zone. One misstep could see blood, whether it is from workers, shareholders, creditors or even the government. In any of those cases, at the end of the day, it will be the people who end up paying the price.

The first challenge is legislative. Kim Chong-in, head of the Minjoo Party of Korea, offered to cooperate in government-led restructuring on one condition — that the government must come up with a convincing big picture and some safeguards against massive layoffs. Kim, a veteran economist-turned-politician, got the upper hand in the restructuring issue by proposing his agenda first. Kim believes the liberal party he is heading will be able to shake off its long-held reputation for dissidence by specializing in economic affairs. He does not have anything to lose since the accountability for failing to come up with a feasible plan and safeguards against layoffs will lie with the government. Yim said he appreciated the offer of help but rejected any form of political meddling. The restructuring could lose direction if there are too many back-seat drivers.

The second challenge is dealing with the unions. The major shareholders of big troubled companies, mainly the owner families, are facing demands to do more to share the pain. Otherwise, restructurings that inevitably call for a streamlining of the workforce cannot proceed. Creditors and the government alone cannot battle with an army of thugs. Workers are determined to not be the only ones to suffer, as was the case during the last large-scale corporate restructuring wave after the Asian financial crisis of the late 1990s.

Employees of Daewoo Shipbuilding & Marine Engineering have already agreed to freeze salaries, stop strikes and lay off 3,000 people from the permanent workforce. But the militant union of Hyundai Heavy Industries, which is the most generously paid in the industry, refuses to go along with any restructuring that has not been approved by the union, and is instead demanding wage hikes. The union had made a bold gambit to give itself a favorable position ahead of restructuring. Yim said there won’t be mega-deals of merging companies to stave off collective labor action before restructuring can take off.

Third, major shareholders — or owner families — want to spend as little as possible from their own pockets. Cho Yang-ho, the largest stakeholder in Hanjin KAL, which serves as the de facto holding company for Hanjin Group, can complain about the bad publicity his family has been getting over Hanjin Shipping. Cho took over the shipping company from his late younger brother’s widow, Choi Eun-young, in 2014, who wrecked its balance sheet through reckless expansion. He injected 1 trillion won ($880 million) over the following two years. Yet he is still asked by creditors to cough up more.

The family members got bad publicity after Choi was portrayed as a former captain deserting a sinking ship by dumping all the shares of Hanjin Shipping owned by her and her daughters just before the company sought debt relief from creditors. The financial authority is investigating the possibility of insider trading in Choi’s stake sell-off.

Fourth, creditors want to avoid losing as little money as possible. Funding is a crucial lifeline in restructuring. Without new cash injections, the patient will die. Creditors hope the government will take up new responsibility. Yim made it clear that the government would only provide the guidelines and leave the surgery to the creditors.

Fifth, in shipping, the number of charters on a fleet directly affects profitability. Hanjin Shipping and Hyundai Merchant Marine slipped into troubled water because of the hefty cost of leasing out vessels. They pay rates four to five times higher than current market rates under long-term contracts that last 10 years. The shippers pay 1 trillion won to 2 trillion won a year in charter fees. The load became heavier as business slowed down. New funding all went to foreign shipowners. Hyundai Merchant Marine is now in negotiations with its ship leasers. It is threatening the shipowners that they won’t get any deferred payments if the company goes under and is asking for rates to be lowered 20 percent to 30 percent to keep the company in business.

Overseas shipowners are studying the situation closely. The government cannot afford to lose Korea’s status as a maritime nation. It will inevitably have to bail out the shipping companies. By buying time, they think they won’t have to cut rates. Their business would be healthier if the two shipping companies merged. Yim poo-pooed the option of a merger. He warned that the two shipping companies are headed straight to court receivership if they fail to lower charter costs.

The financial authority will have to deal with the public. Suggestions are pouring in. Yim has kept a poker face and given away little about the strategy he has in mind. The famous commanding words from legendary war hero Yi Sun-sin could be helpful: “Those who seek death shall live, and those who seek life shall die.” The question is whether this commander is as daring and his troops as willing.

JoongAng Ilbo, April 28, Page 34
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