In a desperate bid to overcome the liquidity crisis, Tong Yang Group said Tuesday it intends to sell off the entire stake in its thermal power arm, after the embattled conglomerate failed to get help from creditor banks and its ex-affiliate.
The family-run company said it is willing to sell a 100-percent stake in Tongyang Power Inc., which is valued at about 1 trillion won (US$931.1 million), according to sources familiar with the matter.
Tongyang Power is considered Tong Yang's core and lucrative subsidiary that has won a major thermal power development project in Korea.
The announcement came as the 38th-largest conglomerate in South Korea is on the verge of bankruptcy since it needs to cover debts worth 1.1 trillion won that are due to mature this year.
The troubled company has been suffering from cash shortages due to a slowdown in its building and hospitality businesses.
It is facing more pressure after its creditor banks, including major player Korea Development Bank, refused to offer financial support, following the refusal from Tong Yang's former affiliate to give help despite a personal favor from Tong Yang Chairman Hyun Jae-hyun.
Tam Chul-kon, the head of Orion Corp., a major confectionery maker, said he cannot accept his brother-in-law's request to provide the loan guarantee for fresh bonds it will sell to refinance debts, citing high risks.
Orion was part of Tong Yang Group until it split from its parent firm in 2001.
In a do-or-die move, Tong Yang decided to give up some of its key businesses, such as its home appliance-making unit and ready-mixed concrete factories.
The widow of founder Lee will donate her 2.66 percent stake in Orion, or 150 billion won worth of shares, to one of Tong Yang Group's affiliates.
A local credit appraiser said in an outlook report that Tong Yang would need at least 800 billion won to tide over the current cash shortage and normalize its business.
"Tong Yang Group needs at least 700 to 800 billion won to deal with the crisis," said Ahn Young-bok, an official from NICE Investors Service Co.
"It must place top priority on settling maturing debts of Tong Yang Leisure Co. and Dongyang International, as financial troubles in such semi-holding firms can have an adverse impact on the group as a whole," Ahn added.
Tongyang Inc., a de facto holding company of the group, saw its debt-to-equity ratio reach 650.6 percent at end-June, and its affiliates Tong Yang Leisure and Dongyang International landed on a cash-crunch as of end-August.
Tong Yang Group was created in the 1970s by late founder Lee Yang-gu as a cement manufacturer before growing into a family-run conglomerate with 31 affiliates under its wing. Currently, both Orion and Tong Yang Group are run by Lee's son-in-laws.