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[Editorial] Preemptive restructuring

[Editorial] Preemptive restructuring

Debt-ridden companies need to cut debt voluntarily

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Published : 2013-12-23 19:26
Updated : 2013-12-23 19:26

Major Korean business groups facing potential liquidity problems are rushing to sell off assets to shore up their balance sheets. This is a well-advised move in light of the recent debacles of the STX and Tongyang groups, both of which collapsed under excessive debt burdens.

On Sunday, Hyundai Group, a second-tier conglomerate separate from Hyundai Motor Group, announced it would dispose of an array of assets to raise 3.3 trillion won ($3.1 billion). It will use the proceeds to lower the average debt ratio of its key subsidiaries from the present 500 percent to the upper 200 percent range.

The list of assets up for sale shows how far the group is willing to go to quell concerns about its financial situation. These include its stakes in Hyundai Securities Co. and two other financial subsidiaries, spelling the group’s exit from the financial business.

Until recently, the group said it had enough cash holdings to see it through the first half of next year. But the financial market has remained unconvinced. It is wise of the group to heed market sentiment. Otherwise, it would have risked following the same path as STX and Tongyang.

A few days earlier, Hanjin Group also unveiled a plan to secure 3.5 trillion won to improve its shaky finances. The plan calls for Korean Air, the group’s flagship, to sell its 28.4 percent stake in S-Oil Corp., a profitable oil refiner, for 2.2 trillion won.

The airline also plans to dispose of its properties, invested assets and older planes to bring down its debt ratio from the present 800 percent to 400 percent by 2015.

Prior to the decisions of these two groups, Dongbu Group announced in November a plan to rebuild its finances. It said it would raise 3 trillion won by selling off its assets. Notably, it decided to sell Dongbu HiTek, a non-memory chip producer in which it has invested enormous amounts of money for more than a decade.

These groups have all decided to swallow the bitter medicine of selling off core assets to restore investors’ confidence in their finances. Now creditor banks need to monitor them to ensure that they follow through on their promises.

Banks also need to press other corporations on poor financial footings to follow suit. Many domestic companies have experienced liquidity problems since the 2008 global financial crisis. These firms might reach their limits if interest rates begin to rise. They need to be pushed to take preemptive steps to avoid a liquidity crisis. In this regard, financial regulators are advised to promote corporate restructuring in a more systematic fashion in cooperation with banks.

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