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Daewoo agreement to boost S.Korea markets-analysts

SEOUL: A debt restructuring plan agreed by troubled Daewoo Group and leading foreign creditors will give South Korea's financial markets a major boost of confidence and may help bring down interest rates, officials and analysts said.

South Korea said on Saturday that a steering committee of foreign creditor banks had reached an agreement on settling the unsecured debt of four affiliates of Daewoo, once one of the country's mightiest conglomerates.

"If this development didn't take place, it would be negative (for Korea)", said Oh Ho Keun, chairman of South Korea's Corporate Restructuring Coordination Committee (CRCC).

The deal "would probably give a psychological boost to the financial markets and confidence will be restored to a substantial extent. It will probably stabilise the capital markets as well," he said.

The plan would apply to $4.84 billion in non-secured loans to the Daewoo affiliates out of Daewoo's total foreign debts of $6.7 billion, the CRCC said. The creditor committee agreed to accept cash from local creditors amounting to around 40 percent of their principal.

Daewoo's advisers expect remaining foreign creditors to back the deal by mid-March.

"The debt plan agreement will surely help clear up uncertainty in financial markets," said Jwa Seung-hee, president of the Korea Economic Research Institute (KERI).

"Most foreign creditors of Daewoo are likely to accept the debt repayment plan because otherwise they have to risk losing all of their money and the terms look reasonable."

The lack of a deal with foreign creditors has created big headaches for Daewoo's South Korean creditors, who put the conglomerate under a debt restructuring programme in August after rescuing it from imminent bankruptcy.

Daewoo's mostly state-run bank creditors faced the prospect of having to write off an enormous amount if foreign creditors had followed through on threats to pursue their claims in court.

Given the size of Daewoo and its web of obligations, failure of the debt workout plan could be a major setback for Korean financial markets and the country's credibility as it works to reform the economy after two years of financial crisis.

"The agreement will greatly contribute to bringing down interest rates," said Kim Young-duk, director-general at the Finance Ministry's international financing department.

He also said the country's credit rating would soon be upgraded due to the agreement.

The Korean government is set to raise a redemption ceiling on investment trust funds with exposure to Daewoo bonds to 95 percent on February 8 from 80 percent.

Analysts said the debt deal could help discourage some funds from redeeming the bonds, averting a feared sharp drain of money from the system which could raise the cost of borrowing.

South Korea's three-year treasury bond yield closed on Friday at 9.28 percent, while the three-year corporate bond yield ended at 10.26 percent.

The stock market should also benefit from the news next week, analysts said.

"The agreement clearly shows that foreign financial institutions think it is ok to continue business with Korea Inc," said Kim Min-tae, an analyst at LG Economic Research Institute.

Analysts said workout plans for Daewoo's other core affiliates would proceed faster now that the uncertainty over the foreign creditors' plans had been removed.

"Local creditors will now be able to provide capital to Daewoo companies to expedite their restructuring," said Jwa of the KERI.-Reuters