[Editorial] Corporate restructuring

Corporate restructuring has again emerged as a pressing issue for the Korean economy as the proportion of companies faltering under heavy debt has reached dangerous levels.

Last week, the Korea Development Bank held a large seminar on corporate restructuring to mark its 60th anniversary. The forum offered a chance for top financial regulators and scholars to highlight the need to restructure poorly managed companies.

Unfortunately, however, the seminar focused only on large corporations with liquidity problems, ignoring another group of companies that need prompt restructuring: potentially nonviable small and medium-sized enterprises.

At the seminar, Shin Je-yoon, chairman of the Financial Services Commission, said that domestic financial institutions should put corporate restructuring at the top of their agenda this year.

He sought to illustrate the seriousness of the problem by drawing attention to the large proportion of companies with an interest coverage ratio below one ― companies that cannot make interest payments with their operating income.

Shin said that a whopping 35 percent of the nation’s 1,500 or so listed companies fell into this category last year. Korea’s figure is comparable to those of crisis-hit European countries with corporate sectors that require serious restructuring efforts. It is higher than 30 percent in Italy and not much lower than 40 percent in Spain.

A 2012 survey showed that 15 percent of domestic companies subject to external audits were zombies ― firms with an interest coverage ratio that remained below one for three years in a row.

Shin said Korea’s corporate debt problem began to worsen rapidly last year following the collapse of the shipbuilding and shipping firm STX Group, the nation’s 19th-largest business group.

The group’s bankruptcy had far-reaching effects, which spread beyond its 3,500 business partners. It affected other financially weak groups by making it more difficult for them to get bank loans or access the capital market.

Yet STX’s debt crisis was a trigger. The corporate debt problem has been a long time coming. Shin noted that banks have been reluctant to take preemptive steps to deal with companies with debt loads that have continued to accumulate.

True, banks’ responsibility is undeniable. Yet Shin and other financial policymakers cannot avoid responsibility either. They have not properly guided banks to address the corporate debt bomb.

Furthermore, they have not taken any action whatsoever toward nonviable small and medium-sized enterprises that have barely stayed afloat on government subsidies. These zombies should be weeded out to provide breathing space for more competitive players and start-ups.

The government still does not seem fully aware of the urgency of restructuring the SME sector, given the exclusion of this task from the recently announced three-year plan for economic innovation.

The plan calls for investing 4 trillion won to build a sustainable venture ecosystem. The project is intended to facilitate the creation and growth of venture companies. But the best way to foster start-ups is to speed up the exit of nonviable firms.

For this, the government needs to reform the current credit guarantee system. Credit guarantees are intended to help venture companies take out loans from banks during their initial period.

But presently, many companies continue to receive credit guarantees long after the start-up phase, using up the funds that should be allocated to nascent firms.

To revitalize the economy and stimulate corporate investment, the government needs to promote corporate restructuring. It needs to concentrate support on financially distressed but viable companies, while cutting off government-provided lifelines to nonviable ones.