Premise
1. Ever since the outbreak of the economic crisis of a year ago, our economy concentrated its heart and soul toward quickly pulling itself out of the turmoil. Special attention was devoted to fixing the fundamental causes that brought about the economic crisis, which called for the overhaul of financial, corporate, labor and public sectors as well as implementation of relevant deregulation and foreign investment liberalization measures.
Owing to the facilitated and bold implementation of financial sector restructuring, the financial market has been stabilized. On top of this, we now have a more harmonized labor-management relationship backed by a more flexible labor market, a more reliable social safety net, and with the privatization of the public sector as well as management improvement, public sector reform has also come a long way.
2. Building on the 5 major principles for corporate restructuring agreed upon between president-elect Kim Dae-Jung and representatives of the 5 leading chaebol on January 13, 1998, corporate restructuring has also been pursued continuously. Legislative measures toward enhancing transparency of corporate management, unwinding of cross guarantees, strengthening of accountability of controlling shareholders and management have been completed.
Furthermore, by lifting tax impediments, introducing the foreign investment inducement law, and fully opening the M&A market to foreigners, the necessary institutional framework to facilitate restructuring is in place.
3. Riding on such institutional support, a large number of corporates were sold-off, exited, or reborn as new corporates. However, unfortunate to us all, in many instances existing management had to be replaced and unemployment rose significantly, causing economic players to suffer tremendous pain along the way.
The top 5 chaebol are commended for their efforts toward pushing corporate restructuring. Especially they have derived voluntary business restructuring plan for 7 industries so as to reduce over-capacity and to focus on core competence. And each chaebol came up with self-rescue plans to resolve marginal corporates and sell-off non-core businesses, along with plans to induce foreign capital.
4. Nevertheless, at this point in time, our economy desperately calls for greater substance and speed in carrying out restructuring of the top 5 chaebol. We must be clearly aware of the fact that the essence of the matter lies on how much of actual change has taken place to the level acceptable by the people and the international community, not simply on how much is different from the past.
It is hard to deny that the voluntary restructuring of top 5 chaebol fall behind in producing concrete evidence compared to other corporate categories. To mention the more noticeable changes over 20,000 SMEs were closed down, and around half of the top 6-30 ranking chaebol have overhauled their tight links of the past. Progress on realigning business lines to focus on core competence as a way to enhance global competitiveness has not won over the votes of the people either.
Consequently, not surprisingly the top 5 chaebol continue to control over 30% of total loans and such excess leverage continue to raise concerns of soundness of financial institutions, and thus investment rating agencies are still reluctant to confirm a favorable adjustment to the current non-investment grade sovereign rating. More importantly the overleveraged financial structure is also preventing the inflow of foreign capital and voluntary business restructuring efforts have fell short in providing workable and meaningful implementation plans.
5. Although their contribution toward propelling export growth, employment, and industrial development cannot be overlooked, in the new age of borderless competition, the top 5 chaebol will not be able to function as the nation’s economic engine without first tackling the inefficiencies common in the business and financial structure as well as management practices of the past.
It is now time for the top 5 chaebol to fully and swiftly implement the 5 major principles they promised to uphold and to transform its operations into a transparent structure based on a union of independently competent affiliates, thus moving away from previous growth-driven strategies based on an excessive number of affiliates and intra-chaebol transactions. Needless to say, concrete result that fall out of restructuring of the top 5 chaebol is the key to bringing Korea out of the current economic crisis.
Only the expedited restructuring of the top 5 chaebol will bring the reform of financial as well as other sectors of the economy to a successful close. By doing so, individual companies will also be able to take a big leap toward gaining real competence.
With the mutual understanding between chaebols, government and creditor banks as to where we stand and what is needed to be done, we agree to abide by the following points as a way to accomplish the restructuring of the top 5 chaebol in a more timely and effective manner.
Implementation
1. Business Restructuring focusing on Core Competence
1.1 Exit of nonviable affiliates
(1) Those nonviable affiliates with large capital lossㄷㄴ or which cannot reap operating profit to cover financial costs should be exited or restructured.
(2) Creditor banks should stop providing new loans to nonviable affiliates in the same way new loans were suspended to companies that were designated as being nonviable in two other separate occasions.
1.2 Business Restructuring to promote core competence
(3) Top 5 chaebol will restructure their business to make them focus on core competence through the sell-off of affiliates or business sections unrelated with core-competence, spin-offs involving management or employees, mergers, or separation from the chaebol. Each chaebol will restructure their business structure as follows:
o Hyundai will designate those industries such as automobile, construction, electronics, chemical, and financial/service as core competence. It will also separate out affiliates from the group by dividing the affiliates among brothers of the owners’ family, and will transform automobile business into an independent sub-group as a more mid-term task. The number of affiliates will be reduced from 63 to about 30.
o Samsung will promote those industries such as electronics, financial services, and trade/service as core competence and the number of affiliates will be reduced from 65 to about 40.
o Daewoo will promote those industries such as automobile, heavy industry, trade/construction and financial/service as core competence and the number of affiliates will be reduced from 41 to about 10.
o LG will designate those industries such as chemical/energy, electronics/telecommunications, service, and financial services as core competence and the number of affiliates will be reduced from 53 to about 30.
o SK will promote those industries such as chemical/energy, telecommunications, construction/distribution, and financial services as core competence and the number of affiliates will be reduced from 42 to about 20.
(4) Top 5 chaebol will aim at building an independent management system founded on transparency and responsibility to each affiliate.
1.3 Completion of voluntary business restructuring on excessive investment
(5) With respect to business restructuring (so called "Big Deal”) proposed by the top 5 chaebol in accordance with a voluntary agreement, creditor banks and the top 5 chaebol will conclude a feasible implementation plan and incorporate it into the "Corporate Structure Improvement Plan(CSIP)" by December 15. The implementation plan will be based on the following principles:
< Petrochemicals, Aircrafts, and Railroad Vehicles >
o Participants of the newly-established business entities will divide ownership on a pro-rata basis according to their net asset. Total amount of domestic companies’ ownership will be limited to 50%; leaving the rest open to foreign investors.
o Debt/equity ratio of the newly established corporation will be reduced to below 200% level by the end of 1999 through the inducement of foreign investment and the conversion of creditor banks' debt into equity.
< Power Generation Facility and Ship Engines >
o Hyundai Heavy Industry and Samsung Heavy Industry will transfer to Korea Heavy Industry, according to the previous agreements, relevant assets, and debt including machinery, land and others related to power generation facility and ship engines.
< Semiconductors >
o Participants of the newly-established business entity will divide ownership stake at 7:3 as already agreed, and the core management entity will be determined by December 25, 1998 based on consulting firm's assessment. If such is not successfully completed, creditor banks will stop providing new loans to and withdraw existing loans from the corporation responsible for the unsatisfactory outcome.
o Debt/equity ratio of the newly established corporation will be reduced to below 200% by the end of 1999. To achieve this goal, the two corporations will share at least half of related expenses and creditor banks will provide financial support including debt/equity swap.
< Oil refining >
o Creditor banks will support financial restructuring through debt/equity conversion and debt rescheduling on the condition that foreign capital is induced.
(6) For the restructuring of the automobile and electronics sectors which was agreed between the two business groups separate to the others, Samsung and Daewoo will finalize an implementation plan, which will in effect transfer Samsung's automobile business to Daewoo and Daewoo’s electronics business to Samsung by December 15.
2. Elimination of cross guarantees
(7) The top 5 chaebol will eliminate cross guarantees as scheduled by the end of March 2000.
(8) Creditor financial institutions and the top 5 chaebol will unwind cross guarantees between different business sectors by the end of 1998.
(9) Creditor financial institutions and the top 5 chaebol will neither require nor provide any new cross guarantees between different business sectors.
3. Substantial improvement of capital structure
(10) The top 5 chaebol and their lead creditor banks will revise Capital Structural Improvement Plans (CSIPs) by December 15, 1998, which aim to lower the debt/equity ratio of each chaebol enough to warrant access to the international financial market at reasonable cost.
(11) The revised CSIPs will include details of the implementation plans for voluntary business restructuring and unraveling of cross guarantees based on the following principles.
o Funds(about 20 trillion Won) raised by self-rescue efforts, including sales of non-core affiliates will be mainly used to repay debt obligation to financial institutions.
o To improve core competence of each group, details of workout plan including debt/equity swap will be included in the revised CSIPs on the condition of satisfactory self-rescue efforts. If needed to induce foreign direct investment, debt-equity conversion will be executed simultaneously with the foreign direct investment.
(12) After the debt/equity swap, creditor financial institutions will not directly engage in the management of the firm as long as management is satisfactory. Instead of directly involving themselves, creditor financial institutions will enhance surveillance of management by designating outside directors and outside auditors.
(13) To ensure thorough and timely implementation of CSIP, the top 5 chaebol and their lead creditor banks will disclose major contents of the CSIPs including annual reduction of the debt/equity ratio, and quarterly implementation status.
(14) When the CSIPs are not carried out promptly or there are signs of violation of the CSIP, creditor financial institutions will evaluate viability of related companies, and enforce tighter restructuring plan including transfer of management control, or exercise of claims.
Enhancement of transparency of corporate management
(15) Top 5 chaebol are committed to undertaking measures to enhance transparency of management, as scheduled, based on the agreed five principles of corporate restructuring. The implementation will be focused on the following points.
o Top 5 chaebol will thoroughly prepare for the group consolidated financial statement starting from financial year 1999.
o Management control of the top 5 will be shifted to the Board of Directors with the adequate monitoring of outside directors and independent auditors.
o Top 5 will focus on their core competence, and respect the rules of fair competition by eliminating inappropriate internal transactions to subsidize affiliates.
5. Role of government and creditor financial institutions
(16) To monitor implementation of top 5 group restructuring plan, chaebol groups, government and creditor banks will hold quarterly conference, of which President Kim will preside.
(17) Creditor banks will have primary responsibility for examining and monitoring implementation. Also, the creditor banks shall carry out pledges toward providing support to restructuring, such as debt/equity swap.
(18) Financial Supervisory Commission will monitor implementation of the agreed restructuring plan from the viewpoint of upholding soundness of financial institutions.
(19) Fair Trade Commission will vigilantly watch chaebol groups’ internal transactions out of concerns that such may delay or distort corporate restructuring. However, FTC will allow some internal transactions inevitable for the fair loss-sharing in the context of corporate restructuring. But they will be kept at a minimal level.
(20) In the process of implementation, government will support the restructuring efforts of corporate sector and financial institutions. Especially, government will closely listen to suggestions from the business community, and accommodate them into institutional improvements consistent with international practices and conventions.
* Please refer to the attached file for details.