Debt guarantees among conglomerate affiliates quadruple in a year; financial units cast 399 votes

Debt guarantees among affiliates of large conglomerate groups subject to cross-shareholding restrictions totaled 200 billion won ($150 million) this year, a 325.5 percent jump from 47 billion won last year, according to data released Thursday.

Over the past two years, 14 financial and insurance subsidiaries belonging to major conglomerate groups exercised voting rights a combined 399 times at shareholder meetings of non-financial affiliates.

South Korea's Korea Fair Trade Commission released Thursday its "2026 Status of Debt Guarantees and Voting Rights Exercised by Financial and Insurance Companies within Cross-Shareholding-Restricted Conglomerate Groups," covering 47 such groups designated on May 1.

Affiliate-to-affiliate debt guarantees reached 200 billion won this year, up 153 billion won from 47 billion won last year. Of that total, restricted guarantees — those legally required to be unwound — amounted to 60 billion won.

No such restricted guarantee balance existed last year, but one conglomerate group that already held debt guarantees was newly designated as a cross-shareholding-restricted group this year, bringing it into the tally.

Exempted guarantees — those permitted as exceptions — rose 197.9 percent, from 47 billion won last year to 140 billion won this year. Although 3 billion won was reduced through repayment of existing debt, 96 billion won in new guarantees tied to building export and import infrastructure pushed the overall figure higher.

The Fair Trade Act generally prohibits debt guarantees among affiliates within cross-shareholding-restricted conglomerate groups to prevent credit from becoming overly concentrated in large business groups and to guard against the simultaneous deterioration of affiliated companies. Guarantees made for purposes such as industrial rationalization and strengthening international competitiveness are permitted as exceptions. Restricted guarantees must be resolved within two years.

The Fair Trade Commission said that while the volume of debt guarantees rose sharply this year, the long-term trend since the debt guarantee restriction regime was introduced in 1998 has been one of decline. The absence of any legal violations related to the restrictions, the commission added, indicates that the regime has taken hold as a market norm.

To prevent circumvention of the debt guarantee restrictions through derivatives, transactions between affiliates using such instruments were also brought under scrutiny. A related notice enacted in April last year and enforced from April this year after a one-year grace period governs attempts to evade the restrictions through three types of derivatives: total return swaps, credit default swaps and credit-linked notes.

As of the end of July, the total value of total return swap transactions among affiliates of cross-shareholding-restricted groups stood at 1.06 trillion won, unchanged from last year. The number of conglomerate groups involved remained at three, and the number of transactions held steady at nine.

The underlying assets in all transactions were shares, and no new contracts were signed — only extensions of existing ones. No cases of affiliate transactions using credit default swaps or credit-linked notes were identified.

The commission also disclosed data on voting rights exercised by financial and insurance subsidiaries of large conglomerate groups at shareholder meetings of non-financial affiliates.

A Fair Trade Commission probe covering May 14, 2024, through April 30 this year examined 18 conglomerate groups whose financial and insurance subsidiaries held stakes in non-financial affiliates. The investigation found that 14 financial and insurance companies belonging to six of those groups exercised voting rights a total of 399 times across shareholder meetings of 20 non-financial affiliates.

The number of financial and insurance companies that exercised voting rights fell from 16 entities across nine groups in the previous probe to 14 entities across six groups. By contrast, the number of legally exempted voting rights exercises rose sharply, from 161 to 312.

The commission said the increase reflects a change in how votes are counted. Starting this year, shareholder meeting agenda items are tallied individually rather than by broad category. Previously, a single articles-of-incorporation amendment covering multiple items was counted as one case; from this year, each individual item is counted separately.

The Fair Trade Act restricts financial and insurance subsidiaries of large conglomerate groups from exercising voting rights on shares of domestic affiliates, to prevent controlling families from using customer deposits to maintain or expand their grip on the group.

Exceptions are permitted for shares acquired or held in the course of conducting financial or insurance business, or shares acquired with regulatory approval. Voting rights may also be exercised within certain limits on some shareholder meeting agenda items — such as the appointment or dismissal of executives at listed companies, amendments to articles of incorporation, and mergers or business transfers involving non-affiliated companies.

The commission said it plans to continue monitoring debt guarantees and voting rights exercises by financial and insurance subsidiaries of large conglomerate groups on a regular basis. It added that it will closely watch for new types of transactions designed to circumvent the debt guarantee restrictions and will impose strict sanctions if violations are confirmed.