SEOUL, Nov. 30 (Korea Bizwire) – South Korean marginal companies are finding it more difficult to cope with their debt as the economic slowdown makes it harder for them to meet interest payments and other financial obligations, a local think tank said Sunday.
The corporate debt and restructure report released by the Korea Institute of Finance (KIF) showed debt accrued by private sectorcompanies hit 1,253 trillion won (US$1.08 trillion) as of late June.
This is equivalent to 82.8 percent of the country’s nominal gross domestic product, up slightly from 83.6 percent in 2009.
The KIF said while the debt ratio for all South Korean companies has fallen from 95.1 percent in 2009 to 79.2 percent in 2014, difficulties facing marginal businesses have worsened.
Marginal companies refer to firms whose interest coverage ratio (ICR) has stood below the 100 percent mark for three straight years. ICR is the ratio used to determine how easily a company can pay interest on outstanding debt. A reading below 100 percent means a company is not able to fully finance its debt with its profits.
As of last year, marginal companies accounted for 14.8 percent of all firms operating in Asia’s fourth-largest economy, up significantly from 9.3 percent in 2009, when the country was reeling from the fallout of theglobal financial crisis.
Among marginal companies that belong to one of the country’s large conglomerates, the debt ratio stood at a staggering 231.1 percent.
By industrial sector, 18.2 of local shipbuilders were classified asmarginal companies in 2014, up about threefold from 6.1 percent in 2009.
Numbers also rose for transportation companies and steelmakers.
Marginal firms in the transportation sector rose by 8.9 percentage points from 2009 to 22.2 percent last year, while steelmaker numbers moved up 6.9 percentage points to 12.8 percent.
The KIF said that while overall corporate debt levels have been on themend, some industries are struggling to stay afloat.
“With low growth becoming the ’new normal’ the possibility ofcompanies making a comeback is diminishing,” it said. “Under such circumstances, industrywide restructuring is imperative.”
Allowing weak companies to fail can actually benefit related industries as a whole by limiting damage.
The institute said that for shipbuilding, steel and transportation, and to a lesser extent petrochemical and construction businesses, there is a need to push forward streamlining efforts and restructuring on a consistent basis.