South Korea Braces for Wave Of Maturing Corporate Debt
By Jason Booth
The Wall Street Journal
June 1, 2001

HONG KONG -- Crunch time is approaching for South Korea, threatening a liquidity shortage similar to the one that nearly brought the country's economy to a standstill at the end of last year, and throwing into question the future of South Korea's corporate reforms.

The cause of the potential credit crunch: a huge wave of corporate debt that matures in the second half of this year. From large semiconductor makers to smaller firms in industries ranging from steel to shipping, roughly 28% of all corporate bonds outstanding in South Korea will come due around the same time.

Economists and central bankers worry that without both shrewd financial planning by the Korean authorities and some improvement in the global economy, the wave of debt could prompt liquidity to dry up in one of Asia's largest economies.

"We are very much worried about the possibility and closely monitoring the situation" said Jang Han Cheol, an economist with the central bank's Policy Planning of Coordination Team. "If something goes wrong we can't rule out [another liquidity crisis]."

In the six months starting in July, more than 36 trillion won ($27.9 billion) of corporate debt will come to maturity, according to the Bank of Korea. The figure excludes companies that are already in default or in debt restructuring programs. Of the total, the bank described 14 trillion won of that debt as "difficult," meaning that the low credit rating of its issuer would make if hard to refinance the debt in the case of market instability. The six-month total is more than twice the amount of bonds that came due in the first half of 2001, and almost 30% heavier that the wave of debt that struck in the second half of 2000.

"The second half will definitely be the peak of maturity cycle," said Franklin Poon, an economist at ABN AMRO Asia Ltd.

The tightest months will be October through December, when more than 21 trillion won of debt comes due.

The fear is that if South Korea's economic situation weakens over the next few months, or in the event of an external shock such as a major bankruptcy, banks and other financial institutions will balk at refinancing such a large amount of debt. In that case, less financially sound companies could find themselves short on cash, possibly leading to a flurry of bankruptcies.

On a broader scale, such instability could batter consumer confidence and spending, which for now is one of the only bright spots of the Korean economy.

"The chickens are coming home to roost," said Raja Visweswaran, a debt analyst at Bank of America Securities. "The companies that have not gotten their act together over the last three years will have a problem."

The coming wave of debt elicits memories of the mini financial crisis that struck South Korea in the closing months of 2000. At that time, total debt due spiked just as confidence in the economy was plunging. Sentiment was further battered by the news that Hyundai Engineering & Construction Co. was at risk of defaulting on debt. The result was that trillions of won was pulled out of investment-trust companies and other institutions with big exposure to the corporate-debt market, diminishing their ability to buy bonds.

The credit crunch that followed prompted the South Korean government to mount a massive financial-rescue package, which included pressing banks and other institutions to buy corporate bonds they otherwise wouldn't have touched.

However, Korea's economy may be in better shape today than it was a year ago. The stock market is looking bullish, possibly providing a source of capital for higher-quality companies. Some of the more financially stable businesses, particularly those in the Samsung group, have generated enough cash over the past few years to weather a liquidity shortage.

And with so much bad news about two of South Korea's five largest corporations -- Hyundai and Daewoo -- already in the market, sentiment may be somewhat more immune to nasty surprises.

Yet there are some negative issues today that weren't such a problem a year ago.

Given the continuing economic slump, very little of the maturing debt is likely to be retired, economists said.

On the demand side, investment-trust companies that are traditionally big buyers of corporate debt have never recovered from last year's fund outflows. In fact, they have seen a substantial net outflow in the last three months. The big banks, meanwhile, are focusing on lending to the retail sector rather than buying higher-risk corporate bonds.

Fear of inflation is keeping the Korean central bank from cutting interest rates, a move that might increase liquidity later in the year. Consumer prices rose 4.7% in May from a year earlier, well above the central bank's target of 2% to 4% for the year.

Another wild card is exports, which make up more than 40% of South Korea's gross domestic product. Many of the companies that will be most in need of refinancing are those that are exposed to exports.

Hynix Semiconductor Inc., formerly Hyundai Electronics, will be looking to refinance more than 2.3 trillion won of bonds. LG Electronics Inc., Korean Airlines, Hyundai Heavy Industries Co. and Hanjin Shipping Co. also stand out on the list of companies with significant amounts of debt coming due.

"If the export situation is positive, nobody will worry [about the debt situation]. But if the situation is negative there will be a thorough review of asset quality and people will be tightening their belts," said Seung Hoon Lee, head of strategy at UBS Warburg in Seoul.

Other potential trouble spots are any disruptions in the restructuring of Hynix Semiconductor, Daewoo Motors or Hyundai Engineering & Construction. Also, a failure by any other major companies or even political uncertainty brought on by President Kim Dae Jung's unpopularity could shake the debt markets.

Should the situation become critical, most economists predict the Korean government will once again come to the rescue, using public money to bail out companies rejected by the bond market. The government could also pressure banks to refinance corporate debt.

But that raises the specter that South Korean companies may never come to grips with their persistent debt problems, leading to the kind of economic stagnation that has been seen
in Japan over the past decade.

"I think that Korea will pull through this with some help" from the government, predicted Timothy Bond, an economist at Merrill Lynch. "But will that lead to the kind of Korea that they want? I don't think so."