4 in 10 builders cannot service interest payments
Officials from Buk District Office in Gwangju inspect an apartment construction site in the city, Nov. 13. Yonhhap
Four out of 10 construction companies are unable to make loan repayments to banks, according to the industry researcher, Tuesday.
Korea Research Institute for Construction Policy (RICON) used an interest coverage ratio to assess the financial status of all the companies in the country that received an outsider's audit in the last year.
A total of 929 companies, or 41 percent, were found to have a ratio below 1. This means the interest they have to repay is greater than their business profits creating solvency issues that make meeting financial obligations difficult.
The number of financially challenged firms in the local industry has been on the rise. They accounted for 32 percent in 2018. The 2022 figure is even higher than the average ratio for the entirety of local industries, which stands at 36 percent.
RICON said the findings single out the construction industry as comparatively more fraught with unstable firms and their number is rising steeply.
The institute noted that companies whose interest coverage ratio has been evaluated below 1 for three consecutive years, or longer, numbered 387. This accounted for 18.7 percent of local construction companies.
Companies in this group have met their financial limitations and are at the bottom level of solvency, according to the institute. They numbered 305 in 2020, or 15.8 percent, and rose to 349, or 17.3 percent, the following year.
Small-to-medium-size companies account for most of the bottom group. They numbered 259 in 2020 and 333 last year. They increased their debts following the COVID-19 pandemic in 2020 when banks introduced low interest rates and later hit back with higher rates. The rise in the price of construction materials ate at their profits, sending many into repayment arrears.
"Unless the country sees an economic rebound in the local construction market, companies in the industry will experience financial setbacks more intensely and broadly next year," an official from RICON said.
"The priority at this point is to keep construction projects in progress from being halted by infusing more cash flow and restructuring companies with potential red flags in advance."