Chaebols face funding crisis

07 July 1997 00:00  [Source: ACN]

SOUTH Korean majors will face a massive funding crisis unless they can radically overhaul how they borrow money if a change in the law is introduced. The change could see a ban or further restriction on the practice of an affiliate company guaranteeing loans of another affiliate belonging to the same group.

Industry analysts report that discussions are already taking place in government circles on a further change to the affiliate-company law. However, as ACN went to press, no-one from the Ministry of Finance was available to confirm or deny this report.

'If the regulations are tightened, we would be significantly affected because we make use of affiliate companies to support loans,' said a Yukong spokesman. 'We would have to look at other methods of raising finance.'

He said there is a good chance the law will become more restrictive.

It used to be possible for a company to take out a loan worth many times the value of its fellow affiliate and guarantor's assets. However, recent legislation has capped such loans to 200% of assets.

'The government changed the law because too many bad loans had been handed out to companies who couldn't meet repayments and the country was facing a banking crisis,' an industry source said. 'I believe the law will be tightened again, probably next year. Companies will be given a grace period of a few years to comply with the revised law.'

The source added that rumours of a complete ban on the affiliate-company practice may have been circulated to encourage the industry to support the present administration as the election approaches.

'There is no way that a complete ban can ever be brought in. It would lead to the collapse of several chaebols,' he insisted.

Sun-Ku Yoon, import and export manager at Hyundai, said Hyundai is already sourcing many of its loans on international markets to avoid falling foul of the existing law.

A spokesman for Hanwha Chemical declined to comment on the possibility of further changes in regulations.

He said efforts are being made to reduce the company's debt ratio.

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