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Regulators boost oversight of banks, overleveraged firms

STX Group’s debt reaches 13 trillion won

By Park Hyong-ki

Financial regulators plan to toughen oversight of conglomerates that have excessively borrowed from their creditor banks to avert another possible STX or Woongjin-style credit crunch in the industry, and contain negative spillovers to the financial market.

The Financial Supervisory Service, the regulatory enforcement agency of the Financial Services Commission, also plans to strengthen its supervision of banks that allowed conglomerates to overleverage their positions without proper evaluation of their balance sheets.

This comes after STX Group faced a debt crisis amid a prolonged slowdown in its core businesses of shipping and shipbuilding, bringing its key subsidiaries to the verge of defaulting on loans of more than 13 trillion won ($11.9 billion).

The group’s subsidiaries such as STX Offshore & Shipbuilding and STX Heavy Industries requested rescue funding from their creditor banks. Its main creditor Korea Development Bank is arranging a set of debt restructuring measures to bail out the debt-ridden companies that could include subsidiary liquidation plans.

Otherwise, companies would face a number of negative consequences such as stock trading suspension and a chain of business failures of STX’s small and medium suppliers.

Banks’ exposure to the financially-troubled STX has also put them in harm’s way, with the state-run KDB being the most vulnerable to the overleveraged group as it lent the largest amount of some 3.9 trillion won, accounting for almost 30 percent of total loans to STX.

KDB-led creditors are considering taking over STX Pan Ocean, while putting STX Construction under a court receivership program.

Other creditor banks of STX Group include the Export Import Bank of Korea, Woori Bank, NongHyup Bank, Korea Exchange Bank, Shinhan Bank and Korea Finance Corp.

“Because of the restructuring request, the banks will face pressure to reclassify their exposure as ‘precautionary,’ and will need to reserve more loan-loss provisions than they did prior to the request,” said Moody’s Investors Service in a report.

These banks are at risk of a rating downgrade due to the overleveraged STX, and the financial regulator is compelled to further draw up guidelines that allow creditor banks to share financial information with other lenders about whether they are fundamentally sound to take more on loans and whether banks, too, have enough buffering capability.

STX chairman Kang Duck-soo founded the group and its subsidiaries through a series of mergers and acquisitions, starting with the ailing Ssangyong Heavy Industries where he was an executive.  (hkp@heraldcorp.com)