South Korea's antitrust watchdog on Tuesday approved the creditor banks' plan to overhaul troubled builder Kumho Industrial Co. via a debt-to-equity swap, paving the way for them to accelerate the restructuring.
Main creditor Korea Development Bank (KDB) and others are seeking to normalize the ailing builder by converting the value of 79 billion won (US$72.8 million) in commercial paper held by its affiliate Asiana Airlines Inc. into equity.
The Fair Trade Commission (FTC) concluded that the creditors' plan is not against the law on banning cross-shareholding, following high-stake deliberations.
Controversy has centered on whether the proposed debt-to-equity swap could be recognized as an exception in banning fresh cross-shareholding when corporate restructuring is involved.
Kumho Industrial holds a 30 percent stake in Asiana Airlines, and if the debt-to-equity swap is conducted, the country's No. 2 carrier will have a 13 percent interest in the builder, which would create the cross-shareholding structure.
The government is considering allowing exceptions in restricting fresh cross-shareholding among large conglomerates, saying that corporate overhaul could result in "unintended" cross-shareholding, hinting at relaxing the enforcement for such cases.
"We welcome the FTC's decision. The creditors will proceed with the restructuring move," said an official at KDB.
Asiana Airlines should dispose of the interest to be acquired in six months after a stake purchase under the current law.
The creditors have pumped nearly 6 trillion won into Kumho Industrial, which has been under the debt rescheduling program since 2010 following its parent group Kumho Asiana Group's liquidity crunch.
Despite the liquidity supply, the builder is still undergoing hardship so that without creditors' proposed normalization plan, its capital might be completely eroded by end-2013 and its shares are likely to be delisted from the market.
Cross-shareholding has been criticized for possibly making a company's governance system opaque and leaving open the chance that an affiliate's business failure could quickly spread to the whole group.