Confusing criteria for exiting insolvent companies

Although the Financial Supervisory Service announced the criteria for exiting insolvent companies, its failure to reveal details on the target companies is causing confusion. Moreover, a criticism is brewing on excessive government intervention over the government drafted selection criteria as the banks are supposed to determine which companies are to be exited.

The FSS announced Thursday that it has confirmed the guide line for evaluation criteria to be used in assessing potential credit risk and determining whether to revive or exit some affiliates of chaebols within the 4th ranking and 5 to 6 parent companies of within the 60th ranking, tallying up to 150 to 200 conglomerates, within October.

The FSS¡¯s guide line, which has been notified to corresponding banks through a meeting of loan committee Thursday, sets exit criteria for companies with borrowings of over 50 billion won at the end of July that did not pay interest payments with their operating income for three years, who are classified as special mention under the FLC and who are viewed by the banks as potentially insolvent.

The FSS would decrease the capital of companies to be revived, after their debts are converted into equity and confiscate the management right from their owners and major shareholders. Moreover, if a bank negligently mispronounces a company that conceals its non-performing loans, as viable, the president of the bank and the owner of the company would be questioned for responsibility.

Consequently, the corresponding banks are planning to set up a credit risk evaluation committee with outside specialists and devise detailed check lists for determining whether to revive or exit insolvent companies within October. D and J companies with S bank as their main creditor bank are likely candidates to be included in the list of insolvent companies to be existed. M and S companies are also likely candidates

After the evaluation, viable companies would be injected with fresh funds from their main creditor banks. However companies suffering liquidity problems sparked from the restructuring process and yet deemed self-viable would have their debts converted into equity. Otherwise, they would be liquidated through court receivership, M&A or transferred to company restructuring vehicle (CRV).

Hong Chan-Sun hcs@donga.com