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South Korea's Financial Regulator Assures Markets Over Daewoo Debt

Strategic Insights

— 1 min read

South Korea's Financial Supervisory Commission, led by Lee Hun-jai, has reassured the market that most financial institutions would be able to absorb up to half of Daewoo's $50 billion debt without experiencing significant difficulties. However, the commission acknowledged that a few weak financial institutions, including two investment trust companies and two banks, might require government aid to survive a potential liquidity crunch if Daewoo defaults on its debt. The remarks were made ahead of today's creditors' meeting in Tokyo, where creditors are expected to release new financial data for Daewoo, including estimated loan losses, as part of a debt restructuring plan.

Key Takeaways:

  • Most financial institutions in South Korea would be able to absorb up to half of Daewoo's $50 billion debt without significant difficulties.
  • However, several weak financial institutions, including Korea Investment Trust and Daehan Investment Trust (holding 20% of Daewoo's $18 billion bonds), and banks Seoulbank and Korea First Bank, may require government funds to survive a potential liquidity crunch.
  • Minority shareholders in Daewoo are likely to suffer losses due to the debt restructuring plan, which may involve debt-for-equity swaps or convertible bonds, leading to a capital decrease.
  • Foreign creditors, holding a fifth of Daewoo's debt, have yet to reach an agreement on debt rescheduling, and a meeting between overseas and domestic creditors is scheduled for tomorrow in Tokyo.
  • The sale of Daewoo's assets is expected to help reduce creditors' losses, but Daewoo's trade union has threatened to go on strike next month over fears of job cuts.

Statistics:

  • Daewoo's debt: $50 billion
  • Debt held by foreign creditors: a fifth of the total ($10 billion)
  • Debt held by domestic creditors: a fourth of the total ($3.75 billion)
  • Total corporate bonds issued overseas by Korean companies from July to date: $1.9 billion (compared to $5.8 billion in the first half of the year)
  • Interest rates on Daewoo's debt: may be reduced according to a proposed creditor agreement

Sources:

  • Financial Times Limited, 1999. All Rights Reserved.

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