Companies go all out to secure cash amid economic downturn, higher interest rates

By Kim Hyun-bin

Major companies are scrambling to increase their cash reserves as it is becoming harder to raise capital on soaring interest rates amid the deepening economic downturn, according to industry officials, Wednesday.

The interest rate on business loans has soared to the highest level in 10 years, exceeding 5 percent. The Korea Economic Research Institute predicted that the annual interest burden on corporate loans would increase by at least 16.2 trillion won ($12.3 billion) from September this year to the end of next year due to the continued interest rate hikes.

As interest repayment pressure increases, companies are reducing investments and selling real estate and non-core businesses to raise cash, shifting their management focus rapidly from growth to survival.

“The U.S. base rate is expected to reach 4.5 percent this year and 5.5 percent next year. The highest mortgage loan in Korea will rise to 10 percent. It becomes more difficult to borrow money from the bank and the burden of interest rates increases,” Kim Dae-jong, an economics professor at Sejong University said. “Even large corporations could go bankrupt. Companies should reduce their inventory and increase their cash reserves. Next year, in 2023, the global economic growth rate is expected to be 1.7 percent. As the economy faces more difficulties next year, companies are responding to the crisis by cutting new investments, cutting costs and increasing cash reserves.”

Another reason why companies are increasing cash assets is to seek future competitiveness through mergers and acquisitions (M&A) and expand production capacity through facility investments when the economy starts to recover.

Out of the 12 major listed companies' third-quarter financial statements, 10 companies increased their cash holdings, while only two remained unchanged.

Samsung Electronics had the most cash holdings with 128.2 trillion won, but its total increase rate was 3.3 percent, which was smaller compared to other major listed companies. Hanwha Solutions had the largest increase in cash holdings, up 41 percent compared to the previous quarter.

Some SK Group affiliates have been accumulating cash by selling non-core businesses. On Dec. 2, SKC sold a 100 percent stake in its polyester film business to Hahn & Company, a private equity fund (PEF), and received a lump sum of 1.595 trillion won from the sale.

LG Electronics also took a conservative turn. The company's cash holdings, which stood at 5.6194 trillion won in the first quarter, increased by 35.7 percent to 7.5677 trillion won in the third quarter.

POSCO Group, which has declared its cash-centered management policy, is also piling up its cash holdings, with its third-quarter holdings increasing by 9.5 percent from the first quarter.

“In order to preemptively prepare for complex economic shocks, we will immediately start emergency management at the group level,” POSCO Group Chairman Choi Jeong-woo said during a group executive management meeting held in October. “We need to further strengthen cash-oriented management so that this does not become a problem.”