3 out of 10 firms failed to pay interest: BOK

By Lee Kyung-min

Three out of 10 firms have failed to pay their loan interest in 2018, indicating a growing number of Korean companies are feeling the pinch amid the economic downturn, the central bank said, Thursday.

It expects the number will reach 40 percent if the ongoing U.S.-China trade feud escalates.

Particular caution is required by lenders about what could develop into a major default crisis, as more firms will struggle to pay interest in the coming months, it added.

According to the Bank of Korea (BOK), of 21,213 firms subject to outside audit, 32.1 percent saw their interest coverage ratio at below 1, the highest number after 25.9 percent in 2010 when the central bank began compiling data.

The figure for their average slid to 5.9, down 0.4 points from the year before.

The ratio, used to assess the risk of lending to a firm, is calculated by dividing a company's earnings before interest and taxes by the company's interest expenses for the same period.

It is used to see how well a firm can pay the interest on an outstanding debt. A ratio of below 1 means a company's operating profit was too small to even meet the interest payments.

Financial institutions should be fully equipped with countermeasures to manage such a risk by increasing loan loss reserves and other capital, the BOK said.

“Business strategies should be organized to absorb the shocks from what could become a full-blown crisis, especially export firms that are subject to greater uncertainties,” a BOK official said.

Of the total, those that saw the below-1 reading for two consecutive years stood at 20.4 percent, while those with the reading for three consecutive years was 14.1 percent.

The ratio for SMEs stood at 2.5 and that for conglomerates at 7.5.

By sector, 54.9 percent of shipbuilding firms had readings below 1, along with 37.8 percent of auto firms.

In the event that the trade dispute results in an average of 3 percent decline in their sales, their interest cover ratio will drop to between 5.1 and 6.6 for the larger conglomerates and 2.2 for SMEs.

This would mean firms with the ratio of 1 or below will soar to 37.5 percent, up 5.4 percentage points from last year's 32.1 percent.

The scenario assumed that key industries ― chipmaking and electronics ― would suffer a 6 percent sales drop and the remaining firms 1 percent.

This is a business environment harsher than 2015, when their sales grew at the slowest rate since the global financial crisis.