Attempt at Corporate Restructuring Using Market Mechanisms : Experiences in Japan and its Implications for Korea[17-02]
Suk Hyun, 이형기
The date
18 July 2017
Capital and Financial Markets
Securities and Banking Industries, Financial Groups

In the wake of the 1997 Asian financial crisis, an overhaul on Korea’s legal framework governing corporate restructuring began, while massive, government-led restructuring was carried out expeditiously. Without an established legal framework and a restructuring market, the government and banks took initiatives in addressing excessive debt in the private sector and distress in the banking sector. More recently, the need for corporate restructuring has been rising again as the number of distressed firms has increased amid external uncertainties since the 2007 global financial crisis.

Although two decades passed after the 1997 Asian financial crisis, Korea’s corporate restructuring is still carried out by the existing method via the government and public financial institutions. The existing method, however, reached its limit given the problems exposed by the government-led restructuring of shipbuilding and shipping industries, and other political issues. Thus far, many studies point to those problems, arguing that Korea should break away from the existing restructuring method largely led by the government and public financial institutions, and facilitate restructuring based on the market mechanism.

However, despite the rapid growth of Korea’s private equity funds expected to play a greater role in market-based restructuring, their capabilities fall short of restructuring heavy industries such as shipbuilding that requires a vast amount of capital ranging from a couple of trillion won to dozens of trillion won, and a long period of time until business normalization. Against the backdrop, this study analyzes Japan’s business rehabilitation (restructuring) case that taps into the market mechanism, and draw out meaningful implications for Korea’s directions for restructuring. Based on those implications, I seek to suggest a restructuring structure for the government that is suitable for addressing market failure while capitalizing on the market mechanism.

Restructuring in Korea and Japan was initiated by external factors, rather than voluntary efforts. Korea’s restructuring first began as part of efforts to overcome the 1997 Asian financial crisis. In Japan, restructuring kicked off to handle distressed debt and distressed firms that snowballed in the 2000s after the burble burst. The two countries share some common backgrounds, for example, business management prioritizing growth over profitability in the period of high economic growth, the resultant investment (supply) glut, management failures, the absence of debt governance due to heavy reliance on government-led financing and the main bank, etc.

Also common between the two countries is the legal and institutional framework governing restructuring. For example, Korea enacted the Special Act on the Corporate Revitalization, modelling after Japan’s Industrial Revitalization Act and the Industrial Competitiveness Enhancement Act. Despite the two countries’ similar experience and legal and institutional environment, they differ in terms of the restructuring method. Although Korea shifts toward market-friendly restructuring using private equity funds, etc., its restructuring still relies heavily on the government and public financial institutions. By contrast, Japan capitalizes on the market mechanism for restructuring due to the prevailing criticism on the use of public funds, as well as large-scale distressed debt in banks.

More concretely, Japan began its corporate restructuring efforts to deal with distressed debt accumulated after the bubble burst in the 1990s. However, after its public fund injection during the process faced severe criticism, Japan turned to market-friendly restructuring using private sector capital and expertise, moving away from government-led restructuring. In line with this, Japan temporarily operated the Industrial Revitalization Corporation of Japan (IRCJ) that served to plug the gap between reorganization and workout regimes by efficiently handling restructuring agenda that had long remained unsolved.

Through IRCJ, Japan provided risk capital and shifted its restructuring method toward a market-friendly one that fully takes advantage of private sector capital, expertise, know-how, etc. Especially, IRCJ worked in the middle of reorganization and workout regimes to contribute greatly to forming Japan’s restructuring market. Organized and established as a private corporation for rehabilitation under the special law, IRCJ also served as a public organization. By using the function of such an industrial rehabilitation body, Japan carried out debt rescheduling and business rehabilitation without direct government intervention and heavy reliance on the creditor banks. And Japanese securities firms brought their investment banking experience to enter the restructuring market either by establishing funds or via principal investment, which helped facilitate public-private rehabilitation funds and private equity funds based on private sector capital.

A comparative look at the two countries’ restructuring experience and regimes reveals the following preconditions to market-friendly restructuring. First, it is necessary to shift away from restructuring oriented by the government and banks. Second, a neutral body such as Japan’s IRCJ is critical in fully taking advantage of workout and helping complex stakeholders involved in restructuring to reach consensus. Third, the government should overhaul the restructuring-related legal and institutional framework, and build a bigger frame of principles on industrial rehabilitation, e.g., Japan’s Financial Revival Program.

For facilitating market-friendly restructuring, the overall direction should shift toward minimizing government intervention; trading restructuring debt at market prices; and improving the going concern value. However, under the current limits faced by Korea’s restructuring and the capital markets, it is worth considering forming a public-private restructuring fund (body) based on the market mechanism, such as Japan’s IRCJ, which helps transform the center of restructuring from the government and creditors to market forces.

Establishing such a body enables public interests (policy goals) and private interests (profit seeking) to coexist during the course of restructuring, and makes restructuring more convincible in the eye of the public. If the shocks of restructuring cluster in certain areas, a regional economic revitalization body will be helpful to exclude pressure from regional politicians and revive the regional economy. A desirable picture is establishing a body via which the burden of restructuring on public financial institutions is transferred to public-private funds, so that the government shares part of risks and improve efficiency of financial resources by tapping into private sector capital and expertise.

At the early stage of restructuring or during a crisis, restructuring is more efficient and speedy if led by the government or public financial institutions that are capable of taking on higher risks and addressing market failure. However, today’s rapidly changing environment exposes problems arising from government failure. A desirable structure is a government-based fund where the government provides risk capital and uses private sector expertise and capital, or a public-private fund. If those two funds help accumulate experience and know-how, take initiatives in developing the restructuring market, and nurture private sector players, this will certainly usher in a market-friendly (market-oriented) restructuring regime where private equity funds and investment banks take the central role.