By Na Jeong-ju
The number of Korean firms which do not earn enough to pay interest on outstanding debt soared over the past three years due to the prolonged economic slump, a think tank said Tuesday.
This is the latest indication that a growing number of Korean firms are exposed to a greater risk of default because they are suffering from sluggish global demand and the rising value of the local currency.
“In particular, construction firms ― big or small ― remain in a long, dark tunnel. Their credit risk is posing a serious threat to the economy,” the Woori Finance Research Institute, an affiliate of Woori Financial Group, said in a report.
The industrial sector’s dark prospects are also weighing on financial companies. The number of major lenders that have refused to roll over loans to builders as bad loans from builders have soared in recent years. This is compounding the headache already suffered by the lenders, which are reeling from worsening bottom lines amid low interest rates and strengthened regulations.
According to the institute, the number of companies listed on the local stock market whose interest coverage ratio stood below 1 for the past three years reached 180 at the end of September last year, or 15 percent of 1,200 firms surveyed.
The interest coverage ratio measures a company’s ability to pay interest on debt. A reading lower than 1 means the firm failed to earn enough to cover interest payments.
The portion of such firms has risen from 12.3 percent in 2010 and 13.4 percent in 2011 to 15 percent in 2012. Of the 180 troubled companies, small and medium enterprises accounted for nearly 89.4 percent and the rest were large ones.
The institute refused to reveal the names of the firms, saying a disclosure could put them in bigger trouble.
By industrial sectors, the firms involved in the electronics and equipment businesses accounted for 26 percent, followed by services firms at 13 percent and manufacturing firms with 12 percent.
“What’s worrisome is that the small firms suffering from financial difficulties are also threatening the financial stability of large businesses,” said Lee Hyung-woo, a Woori analyst. “The combined debt at large firms doubled between 2009 and 2012, while their operating profits rose 54 percent. That means their profitability has worsened quickly during the period.”
Analysts say Korean firms will have to grapple with a cash shortage this year due largely to sluggish sales at home and abroad. Various negatives, such as the weakening price competitiveness of local products on the global markets as a result of the won’s gain against major currencies and rising household debt, are making it more difficult for them to secure enough cash to cover financing and operational expenses.
A recent survey of 500 firms, conducted by the Korea Chamber of Commerce and Industry, showed the majority of the surveyed firms don’t expect the Korean economy to improve significantly this year due to external negatives. Small firms were more pessimistic about their financial outlook than large firms.
The Woori report forecast the number of businesses at risk may rise to 221 this year, citing sluggish domestic demand and worsening profitability of exporters.