Liquidity Crunch Spilling Over Into Big Firms
By Kim Jae-kyoung
Staff Reporter
With the economy continuing on a downward spiral, a liquidity crunch, which is strangling smaller firms, is spilling over into large enterprises, putting further constraints on their financial soundness.
They face the double burden of a cash shortage and mounting debts. A bigger concern is that things are likely to get worse, as exports are expected to dwindle further next year in line with the deepening global recession.
According to industry sources, large enterprises, which used to be financed through equity and bond markets, are now rushing to local banks to secure liquidity, as yields on corporate bonds surged due to the frozen fund market.
The yield on three-year corporate bonds rose to 8.61 percent Friday from 8.13 percent at the end of September, while interest rates on three-month commercial paper jumped to 7.33 percent from 6.67 percent.
However, banks are decreasing loans to large enterprises, as the lenders have to raise their capital ratio under the Bank for International Settlement (BIS) by tightening lending standards. They are also under pressure to extend loans to smaller firms.
``Some large firms have started feeling the pinch of the cash shortage. With the local fund market frozen, large companies are coming to banks to secure liquidity,'' a local bank official said on condition of anonymity.
``But only those in good financial condition are able to get money, due to tightened lending standards,'' he added.
Some large companies are scrambling to savings banks to secure liquidity, as commercial lenders have turned them down.
``Not to mention local builders, some large companies are struggling to secure cash from banks. They are now turning to savings banks,'' said an official at the Federation of Savings Banks. ``However, once they are rejected by banks, it is difficult to get money, even from savings banks,'' he added.
In particular, some companies, considered neither small- and medium-sized nor large, are in bigger trouble, as they are in a gray area where they are not eligible to get support from the government or banks.
``For large enterprises, now is the time to brace for a sharp slowdown in sales growth, as the global economy is heading for a deeper downturn,'' said an analyst at the Samsung Economic Research Institute.
With the deepening cash shortage, large enterprises are suffering from worsening financial soundness.
Top 30 Conglomerates
According to Chaebul.com, an online conglomerate information provider, 164 listed industrial companies under the nation's top 30 conglomerates owed a total of 49.6 trillion won in September, up 58.7 percent, or 18 trillion won, from a year ago.
Of the total, short-term borrowing, which should be repaid within a year, soared by 75.1 percent to 28.9 trillion won, while long-term debts jumped by 39.3 percent to 20.6 trillion won, indicating that large firms' reliance on short-term debts is growing.
With mounting debts, the top 30 business groups' interest expenses reached 4.7 trillion won this year up to September, up 23.3 percent from the year before.
By company, Hyundai Development Company saw its short-term borrowing surge 381.9 percent, the highest among its peers, in the wake of the sluggish property market.
SK Group was saddled with the largest short-term debt at 9.2 trillion won, while Samsung Group's short-term debt jumped by 229 percent. SK Group paid a total of 839.7 billion won in interest this year.
As a result, the average debt ratio for the top 30 conglomerates jumped to 108.5 percent in September from 89.7 percent a year earlier. Debt ratio indicates what proportion of debt a company has relative to its assets.
Among the top 30, Hanjin Group posted the highest debt ratio at 304.8 percent in September, up from 183.2 percent a year ago, as its flagship firm, Korean Air, suffered a net loss of more than one trillion won between January and September.
Dongbu ranked second with 264.9 percent, followed by Tongyang with 263.2 percent, Hyundai with 262.9 percent, Doosan with 251.9 percent, Kolon with 244.7 percent and Taihan Electric Wire with 221 percent.
``Businesses with large short-term debts and high interest expenses should make the utmost efforts to improve their financial soundness through drastic restructuring to ride out the prolonged economic downturn,'' a Chaebul.com manager said.