Global Steel Trade; Structural Problems and Future Solutions

government’s frequent intervention to assist business groups on the verge of failure “stifled the operations
of a well-functioning exit market,” according to the OECD. 36 In 1997, the OECD noted that
…the authorities encouraged firms and banks to enter into bankruptcy avoidance agreements, while
KAMCO [Korea Asset Management Corporation] eased pressures on financial institutions by
purchasing impaired loans with minimal conditionality. 37
By 1997, a number of Korean steel producers were highly indebted and financially nonviable. Hanbo was
only one of many steel producers that disregarded economic fundamentals. In the race for size and
increased exports, some companies assumed extremely large debts and sacrificed profits. 38 The expansion
of many steel producers is typical of yet another tenet of the chaebol business ethos, i.e.,the pursuit of
growth for its own sake.
Apart from Hanbo, a number of other steel companies continued to produce and export while bankrupt.
• As early as 1992, Sammi Steel Co., Ltd.’s creditor banks, including the KDB, had provided emergency
loans to the ailing steel producer. 39 The problems inherent in propping up Sammi were exacerbated
when the financial crisis erupted. Sammi entered into bankruptcy in March 1997 and was under court
supervision until May 2000. Government-owned POSCO was pressed to take over Sammi’s specialty
steel bar and seamless steel pipe operations (the Sammi Changwon Steel Mill), leaving Sammi with
only its stainless steel production lines. 40 In early May 2000, the Korea Asset Management
Corporation, under the authority of the Ministry of Finance and Economy, negotiated a plan with
Inchon Iron & Steel to take a majority stake in the bankrupt company.
• Kia Steel Co., Ltd., part of the Kia group (Korea’s eighth largest chaebol based on assets), 41 also
benefitted from the government’s policy of not letting weak firms fail. In 1997, the KDB exchanged
debt for equity, making the government Kia’s largest shareholder. Kia entered prolonged court
protection procedures and serviced its pre-bankruptcy loans. Kia continued to produce steel throughout
the financial crisis in 1998. 42
• Two other steel producers went bankrupt. Shinho, a pipe and tube producer, went bankrupt in 1994, but
its corporate liquidation plan was not approved until 1998. Hwanyung, an electric arc furnace producer,
went bankrupt in 1996, and its corporate liquidation plan was approved two years later in 1998.
• Another major mini-mill producer, Kangwon Industries, entered into a debt workout agreement with its
creditor banks in 1998.
Without an effective bankruptcy process to act as an exit mechanism for nonviable steel companies, steel
production levels may have been artificially sustained. The ailing steel companies listed above together
accounted for approximately 10 million MT of steel production capacity in 1996—almost one-quarter of
total Korean crude steel production capacity. 43 Several companies had declared bankruptcy and were, in
fact, insolvent. Nevertheless, they were provided emergency loans at low interest rates and obtained
rescheduling of their debt payments. As a result, they were able to continue to produce and export steel
with little interruption of their operations.
In contrast, under U.S. bankruptcy law, companies undergoing reorganization pursuant to Chapter 11 of
the Bankruptcy Code may obtain credit throughout the process only under specific court-mandated rules.
These rules measure whether such borrowing is necessary and consistent with normal business practices. 44
The loans provided to bankrupt Korean steel producers did not appear to follow normal commercial
practices. Moreover, these loans were provided in spite of uncertain prospects of successful reorganization
(under Korea’s Company Reorganization Act ).
The Korean steel industry as a whole was thus significantly worse off than it would have been if there had
been a well-functioning bankruptcy process and exit market. This was true even before the financial crisis
90 Global Steel Trade: Structural Problems and Future Solutions