The Financial Supervisory Service and creditor banks are working to select corporations that will undergo restructuring next year. With a slump in domestic demand and the trio of high inflation, high interest rates and a strong dollar, the number of corporations at risk of insolvency is expected to increase from a year earlier.
According to the financial sector on the 14th, major creditor banks are conducting regular credit risk assessments of small and midsize corporations with credit exposure from financial institutions of less than 50 billion won. The Financial Supervisory Service (FSS) plans to announce the results next month. The FSS will also announce next month the results of the credit risk assessments of large corporations and the construction industry conducted in the first half.
The pool for detailed review of corporations with potential insolvency has reportedly expanded significantly. Creditor banks conduct credit risk assessments each year on corporations with loans. If a corporation falls into the category of potential insolvency in the credit risk assessment, it moves on to a detailed review. Corporations subject to detailed review include those whose interest coverage ratio has been below 1 for three consecutive years or whose operating cash flow is negative.
If a corporation is designated as showing signs of insolvency (credit risk rating C or D) in the detailed review, restructuring proceeds. In last year's credit risk assessment, 230 companies were designated as corporations showing signs of insolvency.
In the ongoing credit risk assessments conducted in the first half by the four major banks—KB Kookmin, Shinhan, Hana and Woori—the number of corporations with a high likelihood of insolvency signs totaled 737, up about 24% from the previous year's 596. The number of corporations subject to assessment also expanded from 685 last year to 844 this year.
In the assessment, those typically rated C enter a creditor-led workout (corporate restructuring program), while those rated D go through the court's corporate rehabilitation procedure (formerly court receivership).
With more corporations subject to detailed review this year, the number of corporations to be restructured is also expected to increase. The Financial Supervisory Service (FSS) plans to select corporations for restructuring based on various criteria, including whether there is support from the parent corporation and future growth potential. An FSS official said, "An increase in the number of corporations subject to detailed review does not necessarily mean that the number of corporations subject to restructuring will increase."