Roundup: S.Korea adopts 9.5 bln USD selective QE for corporate restructuring

South Korea's government and central bank finally reached a conclusion on Wednesday to adopt a so-called selective quantitative easing (QE) to help state-run banks finance troubled shipping firms and shipbuilders by printing money.

The Korean-version QE was proposed by the ruling Saenuri Party on its April parliamentary election campaigns to restructure struggling shipping and shipbuilding industries. Later, President Park Geun-hye ordered reviews to adopt the selective QE, or money-printing for corporate restructuring in specific industries.

Finance Minister Yoo Il-ho, who doubles as deputy prime minister for economic affairs, held a meeting with economy-related ministers to strengthen industrial competitiveness, saying that the so-called capital expansion funds worth 11 trillion won (9.5 billion U.S. dollars) will be created by the Bank of Korea (BOK)'s loans and the government's contribution.

Under the BOK act, the central bank is only allowed to purchase bonds issued or guaranteed by the government, restricting the BOK from providing funds by purchasing bonds sold directly by state-run banks, such as the Korea Development Bank (KDB).

The BOK initially expressed reluctance to purchase equities or bonds from state-run banks, demanding a public consensus by way of the parliamentary approval. Opposition lawmakers had opposed to the selective QE citing possible side effects from the money-printing for specific industries.

To avoid parliamentary negotiations, the central bank will lend 10 trillion won first to the Industrial Bank of Korea (IBK), dubbed a conduit bank, which will provide the loan to the capital expansion funds. The remaining 1 trillion won will be funded by the IBK's subordinate loans to the Korea Asset Management Corp. (KAMCO).

With money from the IBK and the BOK, the KAMCO will set up and manage a special purpose company (SPC), called the capital expansion funds, to purchase contingent convertible bond, or CoCo Bond, issued by state-run banks like the KDB and the Export-Import Bank of Korea (Eximbank).

The CoCo Bond refers to a type of convertible bond that can be converted into equities in contingent situations where the issuers' capital ratios fall below a certain rate or where public funds are required. To minimize losses, the BOK's loans will be guaranteed by the Korea Credit Guarantee Fund.

Despite the complex procedure, the capital expansion funds would mean a money-printing by the central bank for corporate restructuring in specific industries, which President Park called a selective QE.

Apart from the funds, the government pledged to make contributions in kind, worth 1 trillion won, toward the Eximbank, but more than 90 percent of financing for the restructuring funds will be covered by the central bank. The money-printing will be carried out in the way of a so-called capital call, in which the BOK provides loans whenever needed under the 10 trillion-won ceiling.

The size of the restructuring funds is expected to ease market concerns over shortage of capital in the KDB and the Eximbank, which are estimated to have lacked as much as 8 trillion won to meet the newly-adopted capital adequacy ratio under the Bank for International Settlement (BIS) framework.

Issues remained on moral hazard among owners and executives of the troubled companies. South Korean shipbuilders, which are believed to have weathered global slump thanks to advanced technologies, have struggled in recent years with big losses stemming from management misstep in offshore plants in the Middle East.

No responsibility was taken by the owners and executives in the form of private fortune contributions. A former chairman of Hanjin Shipping, subject to the restructuring process, was summoned on Wednesday by prosecutors for questioning in charges of selling all of her own stocks in Hanjin before entering the restructuring process.

Minister Yoo said that the capital expansion funds creation was aimed at tackling possible negative effects from the ongoing corporate restructuring in advance.

Following the April general elections, the government launched the corporate restructuring in shipping and shipbuilding sectors that had struggled with massive losses and falling orders caused by the prolonged slump of the global economy.

Hyundai Merchant Marine, one of the country's top two shipping firms, completed negotiations on ship-chartering fees and debt restructuring, while its archrival Hanjin Shipping would swiftly carry out the restructuring procedures according to the same standards and principles as Hyundai Merchant Marine.

South Korea's top three shipbuilders, including Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering, established their self-restructuring measures worth 8.4 trillion won on expectations that the global shipbuilding industry would be in troubles in the next 2-3 years.

The government-led corporate restructuring has been widely expected to cause massive layoffs in the cited industries that may hit the already fragile private consumption and facility investment.

The BOK has been under pressures to cut the current rate of 1.5 percent, the all-time low level, further to deal with possible economic turmoil from the restructuring process. Endit