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Daewoo foreign debt deal clears way for workouts

SEOUL: Troubled Daewoo Group's agreement to buy out the debt of its foreign creditors removes a big risk in restructuring what used to be Korea's second-largest conglomerate, officials and analysts said on Monday.

After months of tortuous talks, a steering committee representing Daewoo's foreign creditors agreed at the weekend to accept repayment of around 40 percent of the debt owed to them by the four main Daewoo affiliates.

"It has given us a major step towards resolution of the Daewoo crisis," said Oh Ho-keun, chairman of the Corporate Restructuring Coordination Committee (CRCC), which negotiated the deal with the eight-member foreign bank steering committee.

The CRCC represents Daewoo's domestic creditors, who put 12 Daewoo units under a debt restructuring plan last August after rescuing the group from imminent bankruptcy through an injection of emergency funds.

"It means that the conditional approval of the workout plans is one step closer to implementation," Oh told Reuters.

Creditor banks have drafted workout plans that feature massive debt-to-equity conversions, asset sales and fresh funding to revive individual Daewoo units.

The Daewoo Group has combined liabilities of 89 trillion won ($78.9 billion), or nearly $25 billion more than total assets.

DETERIORATION IN CORPORATE VALUES

Local creditors also have been concerned about the ongoing deterioration in corporate values of the various Daewoo units, some of which they are trying to sell to foreign investors. "But I think this deal will have a good effect on that," Oh said.

The deal applies to $4.84 billion in non-secured loans to Daewoo Corp, Daewoo Electronics, Daewoo Motor and Daewoo Heavy Industries.

The four had a total of $6.75 billion in foreign obligations, including secured debt and bonds.

Both sides had threatened to take legal action in the absence of an agreement, a prospect that would have thrown the workout plans into chaos.

A banking analyst with a foreign brokerage said the agreement would be viewed as a positive development all around.

"Foreign banks are happy about getting out with 40 percent. Domestic banks are happy because they don't have to put Daewoo Corp into receivership, which would have been bad for everybody."

The deal gives foreign creditors a 32.3 percent recovery ratio on their loans to group flagship company Daewoo Corp, whose 34 trillion won in debts are double its total assets.

That was a major improvement over the original offer of a 19 percent recovery ratio for Daewoo Corp, which holds the bulk of unsecured foreign loans.

UNCERTAINTY SURROUNDING BANKING SECTOR

In another sop to the foreign banks, the CRCC is offering "out-of-money" warrants, whose terms will be further discussed.

The warrants are options that allow foreign banks to receive additional money if a Daewoo company's financial situation improves better than had been expected.

The deal clears up a lot of uncertainty surrounding the banking sector, which has been largely ignored in the year-long bull run on the local stock market due to their Daewoo exposure.

"This announcement about Daewoo will give more confidence to investors," the banking analyst said, adding the loan losses and provisioning that local banks will have to make on their Daewoo exposure has become a lot clearer.

Applying the foreign debt formula to debt held by local creditors, it would appear domestic banks face a 51 percent loan loss ratio, the banking analyst said.

That's better than most investors had expected, he said.

"A lot of people had assumed it was so bad they didn't want to touch banks (shares). It means that from the beginning they've overpenalised them for the Daewoo losses."

The CRCC's Oh said term details about the buyout contract still have to be hammered out before it is then sold to Daewoo's more than 200 foreign creditors. Daewoo will launch a month-long road show starting in mid-February to explain the deal, he said.-Reuters