S&P: Korea's Progress Hinges on Use of Best Practices.
TOKYO--(BUSINESS WIRE)--Standard & Poor's
June 4, 2001--Korea's ability to move from a period of economic recovery to one of sustainable growth hinges on the establishment of best practices throughout the corporate, government, and financial sectors, said Mr. Robert Richards, Managing Director of Corporate and Government Ratings for North Asia. Mr. Richards was speaking at press briefing to announce Standard & Poor's June 5 seminar in Seoul entitled "Credit Ratings: Capital Market Best Practices."
"Without the establishment of strong best practices, such as sound corporate governance, prudent financial management, and risk-based lending practices, Korea will continue to be isolated from diversified, cost effective, long-term funding opportunities available in the global capital markets," Mr. Richards said.
Mr. Richards pointed out that certain long-held practices in the Korean market, such as reputation-based lending, revenue growth at the expense of profitability, and lack of transparency, run counter to the expectations of international investors.
"Accurate assessments of credit risk are prerequisites for building efficient businesses; the disclosure standards at Korean companies, however, are often substandard. Thus, the prospects for a revitalization of Korea's corporate sector will depend on the development of an environment in which risks can be known, and can be priced fairly. Recalcitrants who believe that they can hang on to past practices are the greatest threat to future economic growth and stability," Mr. Richards said.
Mr. Richards also remarked that there are positive signs of change emerging in Korea. Some companies have improved their financial structures by increasing capital and selling off assets. Moreover, Korea boasts a handful of profitable, increasingly open companies that compete in global export markets and should ultimately serve as examples for others to follow.
"However, until best practices become the norm, rather than the exception, Korean companies will remain vulnerable to renewed debt or liquidity crisis. For example, domestic lenders are deluding themselves -- and increasing the risk of defaults -- if they think that keeping most debt maturities relatively short -- less than three years -- is a substitute for proper credit analysis and appropriately matching debt maturities with funding needs," he said.
Joining Mr. Richards at the briefing, Ms. Diane Lam, Director of Structured Finance Ratings, Asia, pointed to asset securitization as a key development in Korea's debt markets, and one that is expected to heighten the relevance of best practices in the corporate and financial sectors.
Ms. Lam noted that securitization, such as through reverse-engineered primary CBO structures, offers key access to funding, without which the financial situation of many Korean corporations, large and small, would be dire.
"Firms should capitalize on this lifeline to bring about real changes in their business," Ms. Lam said. "Failing to undertake the needed reforms and fundamental changes will only prolong the current detrimental cycle of short-term fixes and recurring liquidity shortages."
In addition to CBO structures, other types of securitizations, involving assets such as trade receivables, auto loans, and credit card receivables, put tremendous reliance on good data and transparency in reporting on the performance of individual portfolios or assets.
"These deals, whether domestic or cross-border, have the potential to be very positive for Korean companies, and for the local economy as well. Securitizations prompt corporations and banks to improve their data collection, risk management, and loan servicing, as well as investor reporting," Ms. Lam said. "In addition to increasing funding efficiency, measuring and quantifying portfolio performance should lead to increased financial and risk awareness at all levels in a corporation, and ultimately, a return to profitability."
Ms. Lam also noted that, as the market develops, domestic investors are quickly becoming savvier, and are increasingly willing to take on longer term lending. "It will not be long, however, before investors begin to seek high quality, objective analysis to better differentiate the risks in these transactions, and demand higher premiums to compensate for weak structures or other risks, like operational or servicing risks," Ms. Lam said. ---CreditWire