"Borrowing Money Until Collapse"...Companies Missing the Golden Window for Restructuring [Corporate Improvement 2.0] ①

Only 19.6% of Distressed Companies Restructure Within a Year
Fewer Options if Timing for Asset Sales and Business Disposal Is Missed
"You Have to Act While There Is Still Financial Strength"

Editor's NoteThere are indications when a company is headed toward financial distress. Signals such as declining sales and profits, coupled with increased debt, may persist for several years. However, many companies, fearing the stigma associated with restructuring, ignore these warning signs and try to endure by borrowing more until they ultimately collapse. On the other hand, companies that take preemptive action are sometimes able to turn crisis into opportunity. The Asia Business Daily, over the course of three articles, examines the golden time for corporate restructuring in Korea and explores ways to establish a restructuring ecosystem that enables companies to take initiative before falling into distress, as well as the roles of the government, the financial sector, and private capital.

① “Borrowing money until the very end”…Companies missing the golden window for restructuring
① [Interview] "Once cash runs out, it's too late...Restructuring is a management tool, not a failure"
② “Will lending more money actually save companies?”…The essence of restructuring lies not in 'debt' but in 'corporate competitiveness'
② [Interview] “The most important thing is analyzing the causes, then making choices and focusing on them”
③ The government must set the stage...a preemptive restructuring ecosystem driven by companies and the financial sector

“Companies rarely take the initiative to restructure. They hold out until their debt matures, and they can't pay it back—sometimes until they go bankrupt.”

“It’s like skipping the ER and ending up in the morgue.”

The biggest problem with corporate restructuring in Korea is not simply that there are many distressed companies, or that their number is rising. The real issue is that, even after early signs of distress are detected, many companies persist until they run out of funds—ultimately shutting down without ever making it to the operating table. If a company still has financial strength, there are opportunities to weather the crisis through actions such as selling business units, disposing of non-core assets, or scaling back investment. However, once liquidity is depleted, options decrease drastically.

According to financial authorities on September 21, a significant number of distressed companies in Korea only begin restructuring after it is already too late. In the 2024 credit risk assessment, out of 4,028 companies subject to detailed evaluation, 230 companies were classified as distressed (C·D grade). Of these, only 45 companies—just 19.6%—applied for a workout or rehabilitation procedure within one year of being identified as distressed. This is a sharp decrease compared to 43.9% in 2020.

Park Chi-hong, head of the Corporate Restructuring Center at Samil PwC, expressed regret, saying, "Most companies only face restructuring after their resources and liquidity have been exhausted." He pointed out that many companies are missing the 'golden time' for restructuring.

Analysis of these distressed companies shows that, starting about four years before a C grade is issued, dependence on borrowings rises quickly, while sales and operating profit decline as well. In fact, warning signs started flashing several years before distress materialized. Notably, operating profit has failed to return to previous levels even after a C grade was issued. Nevertheless, instead of pursuing restructuring during this period, many companies chose to buy time through additional borrowing or by extending maturities.

There are multiple reasons for delaying restructuring. Factors include a social perception that equates restructuring with failure, concerns over management control and corporate reputation, fears of backlash from employees and unions, and potential repercussions among creditors and business partners. An industry source who requested anonymity said, "It's not as easy as it sounds to make a decision after identifying signs of distress," adding, "For SMEs, whose activities are closely linked with those of large corporations in the industrial ecosystem, it is even harder to make independent judgments."

Experts cite Doosan Group as a representative example of successful preemptive business portfolio restructuring. Doosan Group shifted its focus from consumer goods to heavy industries by selling OB Beer and Nestlé Korea in the past, and by acquiring Daewoo Heavy Industries & Machinery and Bobcat. In the liquidity crisis of 2020, the group implemented a strong self-help plan, including the sale of Doosan Infracore and Doosan Tower. In contrast, companies such as Homeplus are evaluated as having missed the restructuring window by only entering rehabilitation procedures after a severe liquidity crunch emerged.

Experts agree that the focus of corporate restructuring in Korea must shift from “post-crisis debt adjustment” to “preemptive corporate improvement” that begins at the first signs of distress. They also point out that, especially for small and medium-sized enterprises unable to undertake restructuring on their own, policy support should be targeted toward building such an improvement-driven ecosystem.

Myung Eun-jin, partner at Luxcent, stressed the need for preemptive restructuring, saying, "If you wait until everything is depleted and then enter restructuring, liquidation may be your only option." Gu Jeong-han, senior research fellow at the Korea Institute of Finance, likewise argued that, "We should segment credit risk assessments by industry to detect distress more quickly and match companies to financial support programs, thus creating a system that proactively enables restructuring."

This content was produced with the assistance of AI translation services.