Source: FTC

Korea’s Fair Trade Commission said Wednesday that the country’s holding companies had seen their average debt-to-equity ratio fall, with the figure well within regulatory standards.

Korea’s holding companies’ average debt ratio stood at 37.2 percent as of September this year, down from 42.5 percent last year and comfortably below the 200 percent regulatory maximum.

Woongjin Holdings saw its capital erode as it faced a liquidity crunch. HiteJinro Holdings’ debt ratio stood at 87.4 percent, followed by Kolon’s 71.3 percent, Doosan’s 61.1 percent and SK’s 43.2 percent. But with the exception of Kolon, the companies all saw their ratios improve from a year earlier.

The holding structure has helped alleviate the so-called “Korea Discount,” the undervaluing of local stocks, caused partly because of the lack of credibility of the Korean market in the wake of the Asian financial crisis of the late 1990s. In response, the Korean government implemented various reforms, including adopting the holding company approach.

About 25 percent of chaebol have taken on holding structures, but the FTC said that there were still some problems among holding companies and their subsidiaries.

Business transactions among subsidiaries, affiliates and their parent holding companies that are part of family-run conglomerates accounted for more than 14 percent of total operations. This was higher than the average of about 12 percent by conglomerates that did not have a holding company structure.

Also, only about 70 percent of subsidiaries were part of their parent companies’ holding structures, while the other 30 percent, including financial units, remained outside.

The rate at which groups have formed holding companies has been slowing since 2010, in part due to high restructuring costs stemming from complex webs of cross-shareholding and conglomerates’ reluctance to liquidate their key financial subsidiaries.

The FTC reiterated that manufacturing-based conglomerates should be allowed to retain their financial units. But it said that such units should be kept under an intermediate holding company with no equity ties with the manufacturing units, as they need to abide by toughed rules on the separation of finance and commerce.

There were a total of 127 holding companies in Korea as of September, up from 115 a year before. Of them, 32 are part of family-run conglomerates, according to the FTC data.

By Park Hyong-ki (hkp@heraldcorp.com)