The Financial Services Commission of Korea rolled out plans Thursday to strengthen the role of private equity firms in carrying out corporate bailout measures, a move aimed to discourage the practice of credit banks being reluctant to declaring insolvencies of financially distressed firms.

The projected 8 trillion won ($7.09 billion) fund, where state-owned lenders would first contribute half of the funds, to be matched by private equity firms, will be used to refinance mid-sized enterprises.

This year, state-led lenders, including the Korea Development Bank, Export-Import Bank of Korea, United Asset Management Company and National Pension Fund, are expected to raise 1 trillion won and let private equity firms follow. The fund will enter into full gear in five years, according to FSC.

The fund will take over the bonds of insolvent enterprise from the banks and lead the restructuring for normalized operation before selling it and sharing the profits.

The financial regulator cited a need to address mounting demand for a more efficient corporate debt restructuring amid the Korean economy‘s sluggish recovery. 

Private bondholders of debt-ridden companies, mostly banks, had been criticized for their “qualitative assessment” on the distressed companies, such as by keeping liquidated firms from being financially rescued, according to FSC. The banks would maintain a conservative approach out of fear of receiving performance downgrade due to distressed bonds after the firms go through the rescue plan. 

The number of zombie companies, or financially troubled firms that rely on lenders to survive, soared to 3,278 in 2015, up 34.5 percent compared to 2010. Among them, 2,754 are small and mid-sized companies, accounting for 84 percent.

“The more stringent and objective assessment on the firms at high credit risk will help us better spot the distressed companies and allow them to go through swift restructuring,” FSC said in a Thursday statement.

The FSC’s turn to nonbanking capital, or private equity funds, will be a key to swifter bailout, the statement added.

However, rescuing large companies, which make up 16 percent of the entire zombie companies, would still be in the hands of the policy lenders.

“We aim to stimulate the debt restructuring of troubled firms, and we put mid-sized companies to the priority target,” said Kim Yong-bum, an official at FSC in news reports. “Large companies with the market cap of over 1 trillion won will be led by policy lenders.”

Private equity firms’ role in corporate workout process in Korea had been insignificant. Some 5.2 trillion won in sum is run by 45 private equity funds that invest in more than 50 percent of their capital on corporate debt financing. Excluding Uamco, the largest asset management firm, the average volume of a private equity fund devoted to refinancing was 86.9 billion won.

Still, doubts persist over whether the fund operator would be secured with full autonomy in leading the restructuring.

Critics point to how state-led KDB had “no say” in following the government’s decision to instill 4.2 trillion won in the cash-strapped Daewoo Shipbuilding in 2015. The controversy had forced Hong Ki-taek, former state-run KDB chairman, to step down as the vice president of China-led Asia Infrastructure Investment Bank, four months after he took office.

By Son Ji-hyoung (consnow@heraldcorp.com)