[Corporate Improvement 2.0]③ The Government Should Lay the Groundwork... A Proactive Restructuring Ecosystem Driven by Corporates and Financial Institutions

Strengthening Early Warning Systems with Industry-Specific Credit Ratings
Revitalizing Restructuring Through Private Equity Funds and Other Private Capital
Tax Benefits and Regulatory Easing Needed to Attract Private Capital

Editor's Note
There are always warning signs preceding corporate insolvency. Signs such as falling revenue and profits, and rising debt levels, persist for years. Yet, many companies ignore these signals, fearing the stigma associated with restructuring, and sustain themselves by borrowing until they ultimately collapse. On the other hand, companies that proactively address difficulties often turn crises into opportunities. Over a three-part series, The Asia Business Daily diagnoses the golden time for Korean corporate restructuring and explores strategies for building an ecosystem that empowers companies to initiate restructuring before insolvency, while also examining the roles of government, financial institutions, and private capital.

① "Borrowing Until the Brink of Collapse": Companies Missing the Golden Window for Restructuring
① [Interview] "It's Too Late After the Cash Runs Out…Restructuring is a Management Tool, Not a Failure"
② "Can Companies Survive with More Loans?": The Core of Restructuring is Corporate Competitiveness
② [Interview] "The Most Important Thing is Root Cause Analysis, Then Selection and Focus"
③ The Government Must Set the Stage…A Proactive Restructuring Ecosystem Driven by Corporates and Finance

"It's best to go to the hospital before the pain gets unbearable. We need to design a more granular assessment structure for each industry, and the government should proactively lay the groundwork first."

To enable proactive restructuring, it is essential to build an ecosystem where companies, financial institutions, and private capital can take action. Not only should the credit assessment system be subdivided by industry to enable earlier detection of financial distress in companies, but a foundation must also be established to increase the involvement of private capital. There are also calls for practical incentives, such as easing the bad debt reserve requirements for financial institutions that participate in proactive business restructuring projects.

According to corporate restructuring and capital market experts interviewed by The Asia Business Daily on September 23, the starting point for a proactive restructuring ecosystem is a structure where the government provides the framework and financial support, enabling companies, financial institutions, and private capital to act independently and in advance. Currently, Korea's corporate restructuring is centered on creditor-led workouts (corporate financial restructuring) and court-led rehabilitation processes. Both are fundamentally limited because they are reactive measures, applied after corporate insolvency has already surfaced.

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"Strengthen Early Warning and Expand Private Capital Inflows"

First, there is a growing view that a more detailed credit risk rating system must be established to proactively identify insolvent firms. Instead of applying a one-size-fits-all assessment system across all sectors, experts are calling for strengthening early warning systems using customized evaluation criteria for each industry.

Koo Jung-Han, Senior Research Fellow at the Korea Institute of Finance, said, "Because companies rarely pursue restructuring voluntarily and often hold out until bankruptcy, the roles of government and finance are critical. Financial institutions need to set industry-specific standards to spot risk signals quickly, and the government should match relevant support programs based on these findings."

The activation of restructuring via capital markets is also highlighted as a key task. Private capital approaches, such as private equity funds (PEF), offer the advantage of intervening at the early stages of distress, providing options such as funding or divestiture of business units to prevent crises. Lim Jeong-Ju, Head of Korean Restructuring at Alvarez & Marsal (A&M), said, "Rather than waiting until an insolvent company is past the point of recovery before seeking capital, it's crucial for professional advisors and private capital to collaborate while there is still a chance for a turnaround. This way, companies have more options, and existing creditors have a better chance of recouping funds."

Invigorating the Private Capital Market and Offering Tax Incentives

Recently, as MBK Partners faces difficulties restructuring Homeplus in Korea, the private restructuring market is shrinking further. The need for the government to play a catalyst role in shaping the ecosystem is increasingly clear.

Specifically, there is discussion of expanding corporate restructuring funds centered on Korea Asset Management Corporation (KAMCO). Professor Byun Ki-Bum of Myongji University's Department of Economics said, "While private equity (PE) managers are interested in large corporations, small and mid-sized companies often attract less attention. That's why more government matching funds are needed for SMEs and mid-cap firms. So far, KAMCO has launched six such funds, but with increased tax revenue, the scale of support must also increase."

There are proposals for funds that, using artificial intelligence (AI) and productive finance, would help restructure small and medium-sized companies. Yongwoo Lee, Director of Economics Plus Research Institute and a former Democratic Party lawmaker, noted, "Traditional manufacturers and SMEs can be suddenly driven into crisis by business cycles, often missing timely support. Policy finance should serve as the initial push, forming an 'AI Transition Fund' to support productivity innovation and structural enhancements through AI, while banks provide productive finance based on risk assessments."

Calls are mounting for tax benefits and regulatory easing to attract more private capital. Professor Byun recommended, "If corporate restructuring funds received the same 100% income deduction—up to 30 million won—for venture capital (VC) fund investments, more money would be channeled into the market and boost activity." Lucent Partners' Myung Eun-Jin added, "Corporates currently face relatively rigid institutional tools. While grant of regulatory relief in workforce or business restructuring isn't always a requirement, granting more flexibility is necessary so that standards don't become overly rigid."

Incentives for Financial Institutions and Reorganization Safety Nets

Designing practical incentives for corporates and financial institutions to engage in proactive restructuring is also pressing. Park Rae-Soo, Professor of Business Administration at Sookmyung Women's University, stated, "Policy support should include easing the bad debt reserve requirement for new financing by creditor banks and guaranteeing their priority claims, so they can more actively supply preemptive funding."

Experts also argue that the roles of external professionals and consulting firms need to be restructured to strengthen expertise and post-restructuring monitoring. Lucent Partners' Myung stressed, "Many restructuring cases fail not at the planning stage but during execution, so ongoing monitoring is crucial." An anonymous restructuring expert lawyer mentioned that the role, expertise, range of authority, and selection and evaluation criteria of Chief Restructuring Officers (CROs) must be reconsidered for court-led rehabilitation procedures.

In cases of structural industrial crises that extend beyond individual companies, a model where the government provides broad guidelines while companies autonomously initiate restructuring received positive reviews. For example, last year in the petrochemical industry, the government proposed industry-specific guidelines, such as a reduction target for naphtha cracking facilities (NCC), and implemented financial and tax support measures, while allowing each company to independently formulate and execute their own restructuring plans.

Ultimately, the key to building a robust ecosystem lies in creating a virtuous cycle—from constructing an early warning system, implementing customized restructuring rules, supplying financing and funding, providing expert consulting, attracting private capital, and enabling swift rehabilitation in case of failure. Professor Park emphasized, "It's critical to establish a reliable information-sharing network to ensure smooth inflow of new capital into the market. As in the U.S. Small Business Reorganization Act (SBRA), costs and procedures should be simplified, and a customized safety net (multi-door) should be put in place for rapid recovery." -End of Series-

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