Corporate restructuring is not unusual term these days. Especially when the economy comes down to recession and financially troublesome companies are being piled up, the measure of corporate restructuring are considered among its creditors in order to not only revive the troubled company, but also minimize the financial damage from their loan.
Publicly announced in 2001, Corporate Restructuring Promotion Act(hereinafter “CRPA”) had been enacted for the sake of facilitating corporate restructuring process on the company showing a sign of trouble. According to CRPA, creditor is entitled to request auditor’s report for the previous two years from the company who wish to get credit grant. If the company shows the sign of trouble, main creditor bank can demand due diligence on asset and liabilities and valuation on business proposal conducted by external accounting firm in order to figure out the optimal way to manage the company. For instance, if net asset value is bigger than on-going value, the company is considered to be liquidated rather than keep going. On the other hand, if on-going value turns out to be more significant than net asset value, the company shall be allowed to keep its operation under the commitment to recover the management with creditors (also known as Work-out plan)
Currently company restructuring are monitored and operated by creditors and creditor banks in voluntary basis. Creditor bank keep monitoring the status of companies and assessing credit ratings in order to classify the degree of trouble; i.e. (A) : Normal, (B) : temporary liquid deficiency (C) : the sign of trouble (D) : trouble in place. Any company, classified with (D), mostly can be liquidated sooner or later. As for the company ranked either (B) or (C), they can be survived with capital support by creditor to avoid credit crunch and continue its operation on condition that the company shall commit to the proposed restructuring plan, such as business reorganization and personnel restructuring, etc. for the sake of bring the company back on track.
Corporate Restructuring : Small and Medium Shipbuilders
Up until early 2008, Shipping and shipbuilding companies had unprecedented great seasons for years due to the high-rocketed freight rates and high demand of raw material from all over the world. Thanks to the booming global economy, countries desperately were in need of vessels to ship their products and even the price of second-hand vessels broke its record.
Main indicator, such as BDI(Baltic Exchange Dry Index) and BCI(Baltic Exchange Capesize Index) showed that shipping and shipbuilding industries have reached its peak by mid 2008. However, after global financial crisis occurred, the entire indicator took a severe nose dive together as whole economy went down. Especially a lot of new small-medium shipbuilders were established in Korea during the booming seasons with a great expectation of demand. Once demand of new vessels had disappeared, no more shipbuilding orders have been made. Obviously small and medium shipbuilders felt a pain in trouble due to the lack of liquidity by the discontinuance of cash inflow. Monitoring their financial status and performance, creditor banks began to look over some troublesome shipbuilders in early 2009. As a result, four small and medium shipbuilders were selected as corporate restructuring or liquidation. One who ranked as (D) is in process of liquidation. Among (C), two shipbuilders failed to agree on work-out plan and currently in process of company recovery under the court receivership. Only one shipbuilder was survived and in operation under work-out plan until 2013.
Corporate Restructuring : Kumho-Asiana Group
It was quite surprising that one of big conglomerate (also called as ‘Chaebol”), Kumho-Asiana group(hereinafter “Kumho Group”) successfully acquired two companies, Daewoo E&C and Korea Express back to back. Besides the high price tag, approximately KRW 10 trillion, people wondered that how Kumho Group will be able to reimburse their huge borrowings from banks during their buying spree. Still It made Kumho Group to be 8th biggest companies in Korea. However, their sweet dreams did last long enough. Obviously huge borrowings have increased interest payment significantly and they had to reimburse huge amount of PBO(Put back Option), which Kumho Group promised to buy back shares of financial investors at the certain share price of Daewoo E&C even though actual share price did not come close to the certain price, around the end of 2009. To make matter worse, on-going recession deteriorates their financial status and the entire Kumho Group was on brink of declare their insolvency. In order to rejuvenate their financial status, they sought to sell their assets and shares; however, it didn’t work out as they expected. Inevitably creditor banks began to review the situation and decided to put two subsidiaries (Kumho Industrial and Kumho Tire) to work-out program based on mutual agreement between Kumho Group and creditors. Other two subsidiaries are to proceed voluntary restructuring program upon the agreement with its creditors.
Current corporate restructuring apparently is underway in voluntary basis by creditor banks, compared to financial crisis under IMF program; mostly government took a major role on corporate restructuring and management. In most cases, restructuring on small and medium companies depends on creditors’ decision; whereas restructuring on big companies, i.e. Kumho-Asiana Group could be rely on governmental mediation as well as creditor’s opinion. Anyway both cases did or will cause a lot of socio-economic problem; such as shutdown of company, massive layoff, social discomfort and we all will end up paying this social cost eventually. For some cases, the company forced to go bankruptcy protection program not because the company is not capable to survive, but because each creditor could not reach the agreement on work-out plan over their own interest. Personally it is quite disappointing. If the company is capable to sustain its operation and will be able to back on track with a little help or commitment from creditors, it deserves to be saved by work-out plan. Unless each creditor intends to fail to gather their consensus, it is necessary for the government to participate in the negotiation as a mediator in order to figure out the optimal solution.