The Bank of Korea: "Increase in Insolvent Companies When COVID-19 Financial Measures Normalize... Debt Restructuring System Needs Improvement"

The Proportion of Zombie Companies at 15.3%... Highest Since 2010

[Asia Economy Reporter Seo So-jeong] It has been suggested that there is a high possibility of the realization of insolvency among marginal companies once financial support measures responding to COVID-19 return to normal, highlighting the need to proactively reform debt restructuring systems.

The Bank of Korea stated in its report titled 'BOK Issue Note: Global Discussions and Implications on Corporate Debt Restructuring System Improvements' that "as credit risks materialize mainly among vulnerable companies severely impacted by COVID-19, the number of insolvent companies is likely to increase."

According to the Bank of Korea, the proportion of marginal companies in 2020 was 15.3%, the highest level since 2010.

Corporate debt restructuring refers to changes in debt terms such as extension of repayment deadlines, principal and interest reductions, and debt-to-equity swaps. The system aims to minimize economic and social losses by maintaining companies with high recovery value rather than liquidating them. Debt restructuring methods are broadly categorized into four types: rehabilitation procedures, hybrid workouts, enhanced workouts, and voluntary agreements.

Recently, international organizations such as the Financial Stability Board (FSB), the World Bank (WB), and the International Monetary Fund (IMF) have proposed reforms to debt restructuring systems considering the possibility of large-scale bankruptcies centered on over-indebted companies during the normalization of COVID-19 support measures.

Looking at overseas cases, the UK and Australia have introduced measures to protect the business activities of companies undergoing debt restructuring with rehabilitation potential, including suspension of creditors' rights enforcement, exemption of corporate directors from liability, and protection of debtor companies' transactions. Countries like the UK and Germany have introduced court-mandated approval systems that allow debt restructuring to proceed even if some creditors oppose, to expedite debt restructuring procedures.

Jeong Hye-ri, head of the IT Risk Management Team at the Bank of Korea, emphasized, "Although Korea's corporate debt restructuring system, including out-of-court debt restructuring, is relatively superior compared to major countries, it is necessary to consider supplementary measures in light of recent improvements in related systems in major countries."

The report suggested, "Corporate debt restructuring using capital markets should be activated," adding, "Since creditor banks tend to be passive in debt restructuring, private equity funds should purchase restructuring companies from creditor banks and actively engage in debt restructuring, new capital injection, and business restructuring."

It also noted that Korea's voluntary agreements and workouts are creditor-led, often excluding debtors from the process, thus emphasizing the need to foster and utilize experts who can play a fair third-party role. It pointed out the necessity to introduce a neutral third-party insolvency practitioner to enhance fairness and expertise in out-of-court debt restructuring procedures.

Since small and medium-sized enterprises face high entry barriers in terms of cost and time when using rehabilitation procedures and often end up bankrupt, the report suggested the need for out-of-court debt restructuring procedures to complement this. The report stated, "Monitoring should be strengthened to prevent moral hazard among indebted companies," and added, "Through more practical and sophisticated credit evaluations of debtor companies, it is necessary to continuously check whether companies that were financially sound before have deteriorated due to COVID-19, whether they are expected to generate profits in the near future, and whether they are faithfully repaying restructured debts."

This content was produced with the assistance of AI translation services.