Financial sector to raise 1 trillion won turnaround fund

Eight state-run and commercial banks agreed to raise 500 billion won ($460 million) to help restructure cash-strapped small and medium companies on Monday, with the private investment sector set to add another 500 billion won.

The plan, announced by the Financial Services Commission, is part of a government proposal to create an 8 trillion won restructuring fund to be developed over the next five years.

The effort is intended to shift the traditional corporate rescue schemes where state-run banks take the wheel to establish large bailout funds mostly based on taxpayers’ money.

“As one company’s restructuring involves different interested parties, the current measure being led by state-run banks is inappropriate,” said Choi Jong-ku, chairman of the Financial Services Commission.

But the trillion won fund, due to be raised by the end of February, will pool resources from commercial banks and private investors and the money will be used when the need arises.

Participating banks include Shinhan, KB Kookmin, KEB Hana and NH Nonghyup as well as state-run institutions Korea Development Bank, the Industrial Bank of Korea and the Export Import Bank of Korea.

The 1 trillion won fund will be raised in a master?feeder fund structure. A master-feeder fund structure is commonly used to accumulate funds into one central vehicle - the master fund - from separate and distinct “hub” or feeder funds.

In each distinct fund, the master fund, which handles investment from state-run and private banks, is barred from contributing more than half of the investment.

Local asset manager Korea Growth Investment will oversee the main fund.

The other funds will be managed by private equity companies.

“The operator of the master fund is banned from intervening in the management of feeder funds so that the funds will be managed according to market principal,” said a source at the Financial Services Commission.

To enhance efficiency in the restructuring process, the government has set up a pre-emptive screening system through which economy-related government bodies such as the Finance Ministry and Financial Services Commission will jointly analyze and assess companies for their industrial competitiveness and risk factors. Based on results, authorities will present guidelines on how they can raise their competitiveness and lower risk factors.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]