January 04, 2010 |
|Kumho Asiana's emergency restructuring exposes Korea's recovering banking sector, but Moody's say ratings remain unchanged. |
Large sections of Korea's recovering bank sector are exposed to the liquidity problems facing Kumho Asiana Group, which were revealed over the Christmas period after several weeks of stock market rumours.
Last week, Korea's Financial Supervisory Service (FSS) estimated that the country's financial institutions were exposed to W15.7 trillion ($13.5 billion) worth of Kumho Asiana debt, made up of W10.1 trillion in loans, W1.2 trillion in debt securities, and W4.4 trillion in other instruments.
And, argued Moody's Investors Service in a statement on December 31, "the ultimate loss to Korea's banking sector could well exceed the FSS estimate on the banks' credit loss provisioning of W1.2 trillion, if the group's restructuring plan does not play out smoothly".
In the long term, Moody's added, the losses are "likely to adversely and significantly impact the earnings or even the capital levels of a few banks with larger exposures".
The announcement on December 30 that conglomerate Kumho Asiana had agreed with Korea Development Bank (KDB) to restructure its member companies due to its escalating financial problems came less than 10 days after Moody's had released a report (on December 21) which concluded that the "profile of the Korean banking system has been improving". The rating agency cited a better regulatory environment, little immediate threat from disintermediation and strong systemic support by the government.
Yet, Moody's said last week that its ratings for Korean banks are "likely to remain unchanged despite the large exposures of some of these institutions" to Kumho Asiana debt. KDB has by far the biggest exposure, followed by Export-Import Bank of Korea and Woori Bank.
According to news reports, Kumho Asiana, Korea's ninth largest business conglomerate, or chaebol, faces immediate liquidity difficulties mainly because it has to pay about W4 trillion by mid-January 2010 to investors who partially financed the group's purchase of Daewoo Engineering and Construction in 2006. Kumho Asiana bought 72% of the builder but passed on 39% to investors who funded the deal (It retained 33% mostly through Kumho Industrial and Kumho Tires). Daewoo Engineering's share price has fallen around 40% since the acquisition.
The investors who funded the deal include some creditor banks who hold put options that force Kumho Asiana to buy back the 39% of Daewoo Engineering at W32,510 a share -- a lot more than the December 30 closing price of W12,800.
Under the restructuring plan announced on December 30 by KDB's vice-chairman, Kim Young Kee, KDB, via its private equity fund, will buy 50% plus 1 share of Daewoo Engineering for W2.9 trillion. The price of W18,000 is more than 40% above that day's close.
The KDB deal comes after the failure to complete a sale of Daewoo Engineering to one of two preferred bidders, Abu Dhabi-based Jabez Partners and US construction company TR America.
Kumho Industrial and Kumho Tires will be subject to debt workout programmes -- the share prices of both companies fell by their 15% limit on December 30 -- while Kumho Petrochemical and Asiana Airlines will try to sort out their operations independently. And a controlling stake in another affiliate, Kumho Life, could be sold to Consus Asset Management, a Korean private equity firm in partnership with KDB, according to local media last Thursday.
Moody's said that "most banks in Korea" have some exposure to Kumho Asiana companies but covered itself by stating that it currently has "only aggregate numbers and lacks a detailed breakdown of exposures by obligor and product type". It also said it couldn't estimate how much time would be needed to liquidate the group's assets.
The prices of leading Korean bank shares fell by up to 3% before the New Year break.
But, Moody's vice-president and senior analyst, Yougil Choi, gave three reasons why the agency's existing bank ratings "capture the risks".
First, the total exposures at most private sector banks could be written off against 2009 earnings, and those that might exceed earnings represent small proportions of capital.
Second, not all of the sector's W15.7 trillion of exposure would require significant provisioning, because not all members of Kumho Asiana would be subject to the restructuring announced on December 30.
And third, the Korean banks could write-off their Kumho Asiana exposures and still record lower losses than those assumed in Moody's May 2009 downgrades of baseline credit assessments (BCAs) and Bank Financial Strength Ratings (BFSRs) for nine domestic banks, caused by the global recession.
So, Moody's does not, "at this point", see any likely impact on the ratings of KDB or other rated Korean banks. Moody's has assigned a Ba2 BCA and a BFSR of D for KDB, which take into account its concentrated exposures to chaebols and also its policy function as a prominent lender and its traditional role in leading restructurings of problem companies. KDB's foreign currency long-term senior debt rating is A2.
The burden placed on KDB hardly comes at the most propitious time for its newly created successor, the Korea Finance Corporation (KoFC), which completed a global non-deal roadshow in mid-December. KoFC is a new entity set up as part of the privatisation process of KDB, and will take on the public policy functions of supporting small- and medium-size enterprises and providing financing for economic development. It was officially formed on October 28 and is wholly owned by the Korean government through the Ministry of Strategy and Finance.