Corporate Debt Guarantees Among Major Firms Surge to 200 Billion Won

This year, the amount of debt guarantees among affiliates of major corporate groups has increased more than fourfold compared to last year. The Fair Trade Commission reported that 600 billion won in debt guarantees were identified among newly designated corporate groups, a stark contrast to the absence of such guarantees last year.

On October 29, the Fair Trade Commission released its report titled '2026 Status of Debt Guarantees and Voting Rights Exercise by Financial and Insurance Companies in Business Groups with Cross-Shareholding Restrictions.'

◆Daou Kiwoom and LX Group Contribute to Debt Guarantee Increase

As of May this year, the total amount of debt guarantees among the 47 business groups with cross-shareholding restrictions reached 200 billion won, marking an increase of 153 billion won (325.5%) from 470 billion won last year.

The number of corporate groups holding debt guarantees rose from two last year to four this year. Notably, 'restricted debt guarantees,' which are generally prohibited under the Fair Trade Act, increased from zero last year to 600 billion won this year. This increase reflects the debt guarantees held by Daou Kiwoom prior to its designation as a restricted group. Newly designated groups are granted a two-year grace period to resolve their debt guarantees from the date of designation.

Additionally, 'exempted debt guarantees' rose from 470 billion won last year to 1.4 trillion won this year, an increase of 930 billion won (197.9%). LX Group's LX Pantos provided a new debt guarantee of 960 billion won to its affiliate, LX Pantos New Eco Logistics Center. In contrast, KCC Group reduced its guarantee amount from 170 billion won to 140 billion won after repaying part of its existing debt. GS Group maintained its guarantee at 300 billion won, the same as last year.

Of the 1.4 trillion won in exempted debt guarantees, 1.26 trillion won was related to export-import financing, accounting for 90% of the total. The remaining 140 billion won was related to social overhead capital (SOC) projects.

The Fair Trade Act generally prohibits debt guarantees among affiliates of major corporate groups to prevent the financial instability of one affiliate from spreading to others and to avoid concentration of loans from financial institutions within the group. However, exceptions are made for debt guarantees that meet specific criteria, such as those related to export-import financing and SOC projects.

The Fair Trade Commission noted that while the amount of debt guarantees has significantly increased this year, there has been a long-term downward trend since the system's introduction in 1998. It also stated that there have been no reported violations of laws related to debt guarantee restrictions.

◆Intercompany Total Return Swap Transactions Remain Unchanged

The total amount of intercompany total return swap (TRS) transactions, which could potentially be used as a means to circumvent debt guarantee regulations, remained at 10.567 trillion won as of the end of July this year, unchanged from last year. The number of transactions also remained at nine.

The corporate groups maintaining TRS transactions include SK, Hyundai Motor, and DL, with no new contracts signed, only extensions of existing agreements.

TRS is a derivative that allows parties to exchange the income and losses generated from an underlying asset. Certain transaction structures may yield effects similar to debt guarantees, raising concerns about regulatory evasion.

To address this, the Fair Trade Commission established relevant guidelines in April last year, which took effect in April this year after a one-year grace period.

All nine intercompany TRS transactions confirmed this year involved stocks. No transactions related to credit default swaps (CDS) or credit-linked notes (CLN) among affiliates were identified. However, Kolon Group was found to have two CDS transactions with non-affiliated companies, totaling 300 billion won.

◆Voting Rights Exercise by Financial and Insurance Companies

A survey conducted by the Fair Trade Commission on the exercise of voting rights from May 2024 to April this year revealed that 14 financial and insurance companies belonging to six corporate groups exercised their voting rights a total of 399 times at the shareholder meetings of 20 non-financial affiliates.

Of these, 312 instances were exceptions permitted under the Fair Trade Act, a significant increase from 161 instances reported in the previous survey in 2024.

However, it is difficult to definitively conclude that the actual exercise of voting rights has increased to that extent. Changes in the Fair Trade Commission's method of counting agenda items at shareholder meetings and the expanded survey period for certain REITs may have influenced the results.

For example, previously, multiple items included in a single amendment to the articles of incorporation were counted as one, but this year, they were counted separately by item.

The Fair Trade Act restricts financial and insurance companies affiliated with major corporate groups from exercising voting rights over non-financial affiliates to prevent the use of customer funds to maintain or strengthen the controlling family's influence.

A Fair Trade Commission official stated, "We will continue to monitor intercompany debt guarantees and the exercise of voting rights by financial and insurance companies, and we will impose sanctions if regulatory evasion or violations of the law are identified."