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Corporate restructuring: strategies and plans.

1. Background

Amid the global economic crisis, with growing awareness of the importance of restructuring the overall economy in an effort to prevent financial defaults from spreading in the market, the Korean government decided to take restructuring measures that work quickly and effectively in the market.

Unlike during the 1997 Asian Financial Crisis, the current market has not seen any major defaults, which makes it difficult for the government to push forward with one time, full-fledged corporate restructuring as it did back then. Also, as the global economy continues its downward trajectory, corporate restructuring programs are not expected to work as planned.

Against this backdrop, the Korean government built a consensus over taking clear stances and establishing firm principles in pursuing corporate restructuring in order to maximize chances of successful restructuring. Officials from relevant ministries jointly worked to draft restructuring strategies and plans, and they were finalized on February 19, 2009 at the Presidential Economic Crisis Management Committee meeting.

2. Strategies

Basically, the overall corporate sector is subject to on-going restructuring programs. Nonviable companies in construction and shipbuilding industries, whose restructuring has already begun, will be transformed quickly and decisively.

To prepare for possibly worsening market conditions and accompanying corporate defaults, the government will have regulations and funds ready for any potential threat.

Viable companies with strong growth potentials will be rendered full government support in terms of policies including fiscal measures. The government's liquidity supply will help those companies lead Korea's economic recovery and future economic growth.

3. Principles of corporate restructuring

Creditor financial institutions will lead restructuring on the basis of the Corporate Restructuring Promotion Act. The Creditor Financial Institutions Committee, a group of private financial institutions, will have more authority to carry on with corporate restructuring constantly and expediently.

In parallel with creditor-led restructuring, a 'market-led corporate restructuring model' will be introduced to encourage companies to voluntarily restructure themselves. The model will guide companies in following procedures such as asset sales or equity acquisition.

One of the government's main roles in overall restructuring processes is to provide assistance in terms of regulation. The government will grant tax exemptions and other deregulations necessary for effective market-led corporate restructuring. To facilitate bank recapitalization and the purchase of NPLs, legal provisions will be laid out along with fiscal and tax support.

Directions for future corporate restructuring will be drafted with ministries related to the industries subject to restructuring in order to fully reflect concerns regarding increasing overall competitiveness of the industries and minimizing negative impact on public welfare.

4. Key action plans

A. Current restructuring programs

As for non-viable companies in construction and shipbuilding industries which are already under creditor-led restructuring, the government will complete plans by the end of March to support them back to normal business operations. Those excluded from the first round of restructuring are subject to credit risk assessments at the end of March. Follow-up plans will accompany the assessments.

The Economic Financial Support Committee, a joint committee of officials from related ministries, will watch industries and decide on those in need of urgent restructuring. The committee is also in charge of monitoring the proceedings of restructuring and reflecting them on restructuring support programs.

As for large corporations, creditor banks will evaluate the overall financial status of 44 large corporate borrowers under the top 10 chaebols by reviewing their annual financial reports of up to the year end of 2008. If the borrowers fail to meet the standards the creditors set, they have to conclude MOUs of financial structure improvement plans with creditor banks, which incorporate sales of assets and subsidiaries, among others.

To closely monitor and assist creditor banks in leading corporate restructuring, the government will give more authority to the task force teams formed to support corporate restructuring.

B. Market-led restructuring model

To accelerate sales of assets and subsidiaries of the companies under restructuring, the Korean government will establish corporate restructuring funds. The government will also encourage private funds to be a part of market-led restructuring by involving Korea Development Bank in the efforts and providing legal basis to PEFs (Private Equity Fund).

To ensure the successful and smooth operation of corporate restructuring, the government will supply Bank Recapitalization Funds of 20 trillion won: 10 trillion won from the Bank of Korea, 2 trillion won from Korea Development Bank, and 8 trillion won from institutional and public investors. Banks' liquidity support for corporate restructuring will be one of the major factors affecting banks' access to the fund.

KAMCO (Korea Asset Management Corporation) will complete the purchase of NPLs of project financing from mutual savings banks by end-March: the remaining 800 billion won worth of NPLs out of targeted 1.3 trillion won. KAMCO, then, will liquidate banks' NPLs of project financing through April and May, along with bad loans to households and some corporations.

The government will authorize KAMCO to set up corporate restructuring funds for NPL clearance by providing legal basis such as Asset Management Corporation Act at the end of March.

The government will also support corporate restructuring with fiscal assistance and tax benefits. For instance, it will seek ways to increase the base capital of KAMCO in order to improve its capacity to purchase NPLs. As for taxation, financial institutions subject to capital gain taxes imposed on NPL transactions will be allowed to pay them in installments. Losses from writing off bad loans can be deductible as necessary expenses.
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Title Annotation:Policy Issues
Publication:Economic Bulletin (Korea)
Geographic Code:9SOUT
Date:Mar 1, 2009
Words:898
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