An SK Group unit, SK Global, is at the crossroad of survival and liquidation. Its creditor banks have been threatening to seek court receivership for SK Global since talks on a debt-for-equity swap with its main shareholder, SK Corp., collapsed earlier this week.
It is most likely that the court will liquidate SK Global if the trading arm of the nation's third largest business group comes into its receivership. Also, the collapse of SK Global, the de facto holding company for SK Group, will spell its disintegration into separate, independent corporations.
However, there still are chances for a last-minute compromise, with SK Corp. asking for a new round of negotiations. At least in the short term, the general trading company's resuscitation is preferable to its demise, which could have a tremendous impact on the economy.
The prospect of SK Group's collapse has horrified other business groups, some of which may have similar problems hidden from public view. But those who will have to bear the brunt are SK affiliates and the creditor banks.
In addition to the direct losses they would suffer from SK Global's liquidation, SK Corp. and other SK companies would sustain a significant reduction in their access to liquidity. A continued liquidity squeeze would certainly lower their credit standings in the financial market.
A problem of greater magnitude would result from the creditor banks' losses estimated at 4 trillion won, which could set a chain reaction in motion. The losses would force the banks to reduce corporate lending, which would in turn delay recovery from the ongoing slump. Even in the absence of such financial trouble, the nation's economic woes have been deepening because of the North Korean nuclear threat and severe acute respiratory syndrome.
Given the potential impact of SK Global's liquidation on the nation's economy, the government may be tempted to intervene and pressure the creditors and SK Group to compromise. But it is advised to keep its hands off and leave dispute settlement in the hands of the creditors and SK Group, most likely to seek a compromise voluntarily before SK Global's three-month workout program is completed in mid-June.
Inadvertent intervention would serve only to damage foreign investors' confidence in the nation. They are watching closely to determine whether or not the Korean government is wavering in its push for corporate reform.
Lying at the core of the dispute is the creditor banks' demand that SK Corp., which has a 38.7 percent stake in SK Global, convert 1 trillion won of local receivables from the trading company into equity. Their talks broke down when SK Corp., the largest oil refining company in the nation, refused to commit itself to more than 450 billion won Wednesday.
All problems started with SK Global's accounting fraud. A criminal investigation found in March that the company had been overstating earnings, understating losses and concealing debts. Chey Tae-won, chairman of SK Corp., was arrested on charges of fraudulence.
SK Global's deceitful business practices did not end there, if the creditor banks' allegations hold true. They accused the company of hiding its equity stakes in SK Telecom and other SK companies in offshore funds and transferring part of their foreign currency holdings to overseas accounts by illegal means.
The creditor banks also have their share of responsibility for all this mess, as their supervision was not meticulous enough to keep SK Global from doctoring its books and halt runaway spending. If they are to avoid a greater blunder in the future, they will now have to think again seriously and determine if it is worthwhile to rescue the ailing company.
They should be reminded of the damage that misguided decisions at Daewoo Group and Hynix Semiconductor, for instance, dealt to their creditors and also to the nation after the Asian financial crisis. The Korean economy is still suffering from the long lasting effect.
Should the creditors and SK Corp. decide to restart negotiations, it would not be easy for them to determine what amount of debt should be converted to equity - all the more so because SK Corp. would have to pay attention to Sovereign Asset Management Ltd. and other shareholders of the oil refining company, who voiced opposition to its support for SK Global in the past.
If the government has any role to play during the negotiations, it must be limited to ensuring that dispute settlement proceed in a legitimate and transparent manner.