Small Percentage
If the U.S. raises the benchmark interest rate, many companies with many debts are expected to go under, since it will be highly likely that Korea will adjust its standard interest rate. It has been found that there are more than 3,000 of these “zombie companies” in Korea.
According to the Bank of Korea on Nov. 8, the number of zombie companies that maintain their businesses with debt grew to 3,295 at the end of last year, from 2698 in 2009. This means more than 3,000 companies were unable to pay back loan interest and borrowed even more money.
The LG Economic Institute classified 34.9 percent of 628 non-financial listed companies into “zombie companies” as of the first quarter of this year. In 2010, such underperforming companies accounted for 24.7 percent of all companies. Market participants predict that the U.S. will raise its benchmark interest rate in December.
In the event that the U.S. raises the standard interest rate, that of Korea is highly likely to be adjusted within one year, too. The Woori Financial Research Institute stated in a recent report that the adjustment gap will be 9.7 months. This means that if the U.S. elevates its standard interest rate this December, Korea is likely to adjust its standard interest rate in October of next year.
If the Bank of Korea raises the interest rate, companies’ delinquency rates will rise, and companies with serious insolvency will have little choice but to go bankrupt. Experts predict that this will become a big burden on the Korean economy.
In fact, Korean banks’ loans to big companies grew for three consecutive months until September, although they fell in the first half of this year. They rose to 500 billion won (US$433 million) in Aug. from 100 billion won (US$87 million) in July, and soared to 1.3 trillion won (US$1.12 billion) in September. In actuality, the September delinquency rate of Korean banks’ loans to big companies edged down 0.04 percentage points to 1.00 percent from the end of October, but inched up by 0.10 percentage points year-on-year.
It is not a big problem that loans swelled under the circumstances that the interest rate is extremely low, 1.5 percent a year. But their business environments are not favorable and are not likely to improve, giving rise to voicing concerns.
The 2014 Corporate Management Analysis Report recently released by the Bank of Korea says that the manufacturing industry’s sales dropped -1.6 percent last year. Its sales dropped for the first time since the bank began to record such statistics in 1961.
Sluggish sales are driving an increase in companies with falling credit ratings. According to Korea Investors Service, credit ratings of 45 companies (including one bankrupt company) were lowered from January to October this year. This figure is the most since 61 in 1998, when the financial crisis hit Korea.
An increase in companies with lowered credit ratings makes the corporate bond market rigid, narrowing corporate fund-raising channels. This can finally ignite a credit crunch, which can disable even high-flying firms from raising funds. Such concerns are compelling the Korean government to quickly liquidate faltering companies before the U.S. raises its standard interest rate.
The government is planning to restructure them on a full scale through UAMCO, a corporate restructuring-specialized company. UAMCO will select the first company to be restructured within this month, after reshuffling itself.