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Asia-PacificJuly 1 2003

SK scandal: proof of financial reform?

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The recent unfolding of a scandal centring on SK Global Co in South Korea may leave investors somewhat confused about what the Korean government and banks are doing. Are they going in the right direction or is it all for appearance?

Indeed, investors have been paying keen attention to how the government and creditors are handling the financially troubled company. The situation could become a turning point for Korea’s crusade toward corporate restructuring, which has been led by the banks – at least on the surface.

The trading arm of SK Group – South Korea’s third-biggest business group – admitted in March this year to having inflated its 2002 earnings by 1500bn won. Its financial wrongdoing has sent ripples through other SK Group companies.

Creditors have pushed SK Corp – a de facto holding company of the SK Group – and other SK Group affiliates into a corner by calling on them to provide “sufficient and reasonable” bail out packages for SK Global in the face of vehement opposition from shareholder activist groups and shareholders of other SK Group firms.

In the run up to the June 15 decision by SK Corp’s board of directors to convert 850bn won worth of receivables from SK Global into equity, the government has been staying away from the tug-of-war between creditor bank of SK Global and other SK Group affiliates over how to bail out the accounting scandal-ridden company.

This move could be a great departure from the Korean government’s “old and bad” habit of implicitly meddling in the decision-making process by banks, on fears that thorough corporate restructuring may lead to massive lay-offs.

Korean banks, still denounced by foreign investors in particular as the puppets of the government, also have been trying to handle the SK Global case on a commercial basis.

On the surface, the Roh administration and Korean creditors have been getting tough with SK Global. After coming into the office in late February this year, President Roh Moo-hyun has reiterated that his government will uninterruptedly continue corporate and financial restructuring under market discipline.

On the other hand, some critics say the handling of the SK Global problem is just highlighting the snapshot of the bad practice of the past – SK Global had found its way to survival at the cost of shareholders of other SK Group companies and bank loans.

On a strict financial measure, SK Global should be liquidated because the company has a negative net worth of about 3400bn won as of end-December last year.

Sovereign Asset Management, the largest shareholder of SK Corp, has denounced the poor lending decisions by the creditors of SK Global to the company, calling on them to take responsibility for the trading company’s financial woes.

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