Roundup: S. Korea to launch gov't-led corporate restructuring to tackle "zombie" companies

South Korea plans to open a government-led corporate restructuring market to speed up the liquidation of "zombie" companies and resuscitate marginal firms suffering a "temporary" financial stress.

"Corporate restructuring led only by creditor banks faced limitations. It needs to encourage various market players to join it, and market-centered restructuring is preferred," Lee Myung Soon, director general of Financial Services Commission's financial and corporate restructuring policy bureau, told foreign correspondents in Seoul Friday.

To achieve that goal, the financial regulator will expand the task of Uamco Ltd., the country's largest buyer of bad debts, into the purchaser of marginal, or "zombie," companies.

The bad debt buyer was launched in 2009 by six major South Korean banks to acquire non-performing loan (NPL) that increased following the 2008 global financial crisis.

Helped by the Uamco, many of bad debts were liquidated in the NPL market, but those debts were undervalued at about half of the original amount, according to the FSC estimates.

If a certain market player acquires the whole, or a larger, part of bad debts and inserts fresh loans or funds into a marginal company having a temporary financial crunch, possibility would rise for the marginal firm to survive and for its bad debts to be traded at a higher price.

Zombie firms in South Korea surged for the past six years. Marginal companies, which cannot repay even interests with operating profit for more than three years, increased from 2,698 in 2009 to 3,295 in 2014, according to data by the Bank of Korea ( BOK).

As the BOK lowered the benchmark interest rate by a percentage point over a year to a record low of 1.5 percent, some of the zombie firms failed to be liquidated thanks to lower debt- servicing burden.

In addition to massive household debts topping 1,100 trillion won (1 trillion U.S. dollars), corporate debts loomed as a detonator that could cause an economic collapse as the amount surpassed 1,500 trillion won amid the rising number of zombie firms.

The country's corporate restructuring market is estimated at 30 trillion won, more than half of them coming from insolvent shipbuilders, said Ryu Jae-hun, director of the FSC's corporate restructuring promotion division.

The Uamco will serve as a parent company that has affiliated private equity funds purchasing marginal enterprises. State-run Korea Development Bank and Export-Import Bank of Korea plan to participate in the Uamco, said Ryu.

The financial regulator will encourage various players, including securities firms, private equity funds and insurers, to participate in the Uamco's affiliate funds by issuing senior- and subordinate-tranche bonds as well as equities.

General partner (GP) from the private sector will join the restructuring process to drive the marginal companies to be reborn as a profit-making company by streamlining businesses and personnel, which creditor banks had failed to do.

If such Uamco transactions rise, it would create a corporate restructuring market, in which private players buy and sell marginal companies voluntarily based on the prices that the Uamco transactions set.

It would ultimately speed up the liquidation of zombie companies and resuscitate marginal firms suffering from a temporary financial stress, the FSC said. Endi