South Korea's largest credit card issuer, LG Card Co, resumed cash advances to customers on Monday after creditors agreed to extend emergency loans, averting a liquidity crunch that threatened the country's financial system.
Debt-laden LG Card was forced to suspend cash advances over the weekend, raising the specter of a spiraling series of defaults as many South Koreans use their credit cards to pay bills and service other credit card debts.
Finance Minister Kim Jin-pyo told local media the government had intervened to encourage the creditors to provide the emergency loans and praised their "wise decision." His deputy, Bahk Byong-won, said LG Card's problems were not industry-wide.
LG Card's suspension of cash advances and the need for government intervention spooked investors, driving down the stock market 2.2 percent and the won almost one percent.
Analysts said the government had no choice but to act.
"This is a necessary step to not only prevent any bigger turmoil in the financial system, but also to help out the stabilization of credit card issuers," said Yun Seok, analyst at Credit Suisse First Boston, adding there had been a significant squeeze in credit markets for card issuers in recent months.
LG Card has 14 million customers, almost a third of South Korea's population. They owe $22.7 billion and payments on about 10 percent of these debts are overdue, raising fears a fragile recovery in Asia's fourth-largest economy could stumble.
"We resumed cash services at around 4:10 p.m. (0710 GMT)," said a spokesman for LG Card. "The services are not fully restored across the nation but will be normalized soon."
Woori Bank and other lenders agreed late on Sunday to provide two trillion won ($1.68 billion) of fresh loans and to roll over LG's outstanding debt for one year, helping avert its insolvency.
But they warned they could write down LG family stakes in LG Card and sell other collateral if the LG Group parent failed to turn around the card firm. They also said a debt-to-equity swap and a sale of LG Card to strategic investors was possible.
LG Card had faced a default on its debts because its lenders and its parent LG Group disagreed over collateral the group had originally offered in return for the bailout.
LG Group chairman Koo Bon-moo risks losing management control of South Korea's second-largest conglomerate or chaebol since he has given his 5.46-percent stake in LG Corp as collateral. The family behind the LG Group is unlikely to lose control, however, as they have more than 50 percent.
Analysts said the loans had not resolved LG Card's problems.
"We think this liquidity support package may only be able to stabilize rather than resolve LG Card's liquidity situation," said Philippa Rogers, an analyst at Goldman Sachs. "We think LG Card needs to find a strategic investor."
Shares in LG Card fell 15 percent to close at its daily limit low of 7,570 won. "Despite the emergency financial aid, the company is at a very critical point," said Park Seok-hyun, an analyst at Kyobo Securities.
BONDS DELAYED
The economy is also in a delicate state. Data last week showed South Korea only emerged from recession in the third quarter. The fallout spread to the debt markets too.
Hyundai Motor Co, South Korea's biggest auto maker, said it delayed a $400 million bond offer after investors asked for lower prices to account for higher risks on Korean paper. Credit card firms have 25.8 trillion won of bonds maturing next year, 45 percent of which are from LG Card, local media say.
AWASH IN CARD DEBT
The card industry is struggling to cope with the aftermath of a credit boom that has left consumers unable to repay loans and card issuers with piles of bad debt.
Total credit card debt in South Korea at the end of August was 78.43 trillion won ($66 billion), or about 14 percent of annual GDP. Payments are overdue on about 11 percent of the debt.
Credit card firms' problems came to a head in March after an accounting scandal at a conglomerate scared investors off lower-quality securities, making it difficult for card issuers to roll over bonds issued to finance their lending.
South Korean adults carry more than three credit cards each on average, encouraged by government tax breaks aimed at reviving domestic spending and ensuring transparent tax collection.
LG Card customers were surprised by the suspension of cash advances and some chose to use other cards instead.
"I was startled to find I could not use my LG Card to withdraw cash to buy a present for a friend," Jang Eun-ju, a teacher living in a posh neighborhood in southern Seoul. "I won't be carrying that card any more."
Many LG Card customers turned to other cards for quick cash.
"We estimate our cash advances have jumped some 20 percent over the weekend as some customers couldn't borrow against their LG card," said R.W. Lim, a spokesman at rival Samsung Card Co.
Meanwhile, non-banking creditors met on Monday to discuss rolling over their maturing loans to LG Card but no decision has been made yet.
Debt-laden LG Card was forced to suspend cash advances over the weekend, raising the specter of a spiraling series of defaults as many South Koreans use their credit cards to pay bills and service other credit card debts.
Finance Minister Kim Jin-pyo told local media the government had intervened to encourage the creditors to provide the emergency loans and praised their "wise decision." His deputy, Bahk Byong-won, said LG Card's problems were not industry-wide.
LG Card's suspension of cash advances and the need for government intervention spooked investors, driving down the stock market 2.2 percent and the won almost one percent.
Analysts said the government had no choice but to act.
"This is a necessary step to not only prevent any bigger turmoil in the financial system, but also to help out the stabilization of credit card issuers," said Yun Seok, analyst at Credit Suisse First Boston, adding there had been a significant squeeze in credit markets for card issuers in recent months.
LG Card has 14 million customers, almost a third of South Korea's population. They owe $22.7 billion and payments on about 10 percent of these debts are overdue, raising fears a fragile recovery in Asia's fourth-largest economy could stumble.
"We resumed cash services at around 4:10 p.m. (0710 GMT)," said a spokesman for LG Card. "The services are not fully restored across the nation but will be normalized soon."
Woori Bank and other lenders agreed late on Sunday to provide two trillion won ($1.68 billion) of fresh loans and to roll over LG's outstanding debt for one year, helping avert its insolvency.
But they warned they could write down LG family stakes in LG Card and sell other collateral if the LG Group parent failed to turn around the card firm. They also said a debt-to-equity swap and a sale of LG Card to strategic investors was possible.
LG Card had faced a default on its debts because its lenders and its parent LG Group disagreed over collateral the group had originally offered in return for the bailout.
LG Group chairman Koo Bon-moo risks losing management control of South Korea's second-largest conglomerate or chaebol since he has given his 5.46-percent stake in LG Corp as collateral. The family behind the LG Group is unlikely to lose control, however, as they have more than 50 percent.
Analysts said the loans had not resolved LG Card's problems.
"We think this liquidity support package may only be able to stabilize rather than resolve LG Card's liquidity situation," said Philippa Rogers, an analyst at Goldman Sachs. "We think LG Card needs to find a strategic investor."
Shares in LG Card fell 15 percent to close at its daily limit low of 7,570 won. "Despite the emergency financial aid, the company is at a very critical point," said Park Seok-hyun, an analyst at Kyobo Securities.
BONDS DELAYED
The economy is also in a delicate state. Data last week showed South Korea only emerged from recession in the third quarter. The fallout spread to the debt markets too.
Hyundai Motor Co, South Korea's biggest auto maker, said it delayed a $400 million bond offer after investors asked for lower prices to account for higher risks on Korean paper. Credit card firms have 25.8 trillion won of bonds maturing next year, 45 percent of which are from LG Card, local media say.
AWASH IN CARD DEBT
The card industry is struggling to cope with the aftermath of a credit boom that has left consumers unable to repay loans and card issuers with piles of bad debt.
Total credit card debt in South Korea at the end of August was 78.43 trillion won ($66 billion), or about 14 percent of annual GDP. Payments are overdue on about 11 percent of the debt.
Credit card firms' problems came to a head in March after an accounting scandal at a conglomerate scared investors off lower-quality securities, making it difficult for card issuers to roll over bonds issued to finance their lending.
South Korean adults carry more than three credit cards each on average, encouraged by government tax breaks aimed at reviving domestic spending and ensuring transparent tax collection.
LG Card customers were surprised by the suspension of cash advances and some chose to use other cards instead.
"I was startled to find I could not use my LG Card to withdraw cash to buy a present for a friend," Jang Eun-ju, a teacher living in a posh neighborhood in southern Seoul. "I won't be carrying that card any more."
Many LG Card customers turned to other cards for quick cash.
"We estimate our cash advances have jumped some 20 percent over the weekend as some customers couldn't borrow against their LG card," said R.W. Lim, a spokesman at rival Samsung Card Co.
Meanwhile, non-banking creditors met on Monday to discuss rolling over their maturing loans to LG Card but no decision has been made yet.
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