Over the past several years, Korea’s Woongjin group expanded rapidly – perhaps recklessly. Now, with the group facing serious financial trouble, recent actions indicate how little regard the group has for its shareholders and creditors, which have been left to watch share prices plunge and two affiliates file for receivership. Unfortunately, this situation is only part of a disturbing trend with Korean issuers.
Woongjin Holdings (one of five listed affiliates of the group) currently has KRW 4.3 trillion ($4 billion) of outstanding loans, including KRW 3.3 trillion ($3 billion) owed to financial creditors including Woori Bank and Shinhan Bank. Perhaps as a result of this enormous debt, the group attempted to sell its water-purification business (Woongjin Coway Co. Ltd.) to MBK Partners for KRW 1.2 trillion ($1 billion), but that deal collapsed. Subsequently on September 26, Woongjin Holdings and its underperforming construction arm Kukdong Engineering & Construction separately submitted filings to go into court receivership.
On the same day of the receivership filings, it was revealed that one day earlier Woongjin Holdings had paid back debts, totaling KRW 53 billion ($50 million), to two affiliated companies early. This was possibly done to prevent damage to the affiliates, which would have had a difficult time receiving repayment once the company was under court control. Of course, this also leaves less value for shareholders and creditors to receive in a bankruptcy proceeding.
Further angering shareholders and creditors has been the report that Kim Hyang-sook, the wife of the chairman of the group, sold all her stock in Woongjin ThinkBig (an affiliate), worth KRW 400 million ($400,000) just two days before the group applied for receivership, allegedly to avoid the price drop. This move saved her approximately KRW 50 million ($50,000). The FSS has launched an investigation into this potential case of insider trading.
Where was the board of directors during all this? Was the board protecting shareholder interests and voicing concern over the reckless expansion of the group? Unfortunately, according to one report, the board failed shareholders. Disturbingly, since 2009, 409 board meetings held by five listed group affiliates including Woongjin Holdings and Woongjin Coway recorded zero independent director opposition votes on respective resolutions relating to various business expansion plans of the group and its affiliates’ financial support.
The financial woes gripping the group along with the recently revealed moral hazard is provoking large-scale social outrage and economic backlash across the country. Unfortunately, this is but one example of an alarming trend: the number of firms applying for receivership has increased from 76 in 2006 to 712 last year. Court receiverships appear to be being abused in Korea, causing negative impacts on financial firms and shareholders alike.