The proportion of so-called “zombie companies” unable to cover interest costs with their operating profit has reached its highest level since 2009, standing at 42.3 percent last year. Due to the global economic slowdown and the impact of high interest rates, corporate underperformance persisted in the first half of this year, raising concerns that corporate debt defaults could become an economic burden.
According to the corporate management analysis results for 2022 released by the Bank of Korea on Oct. 25, among non-financial profit-making corporations, 42.3 percent had an interest coverage ratio of less than 100 percent last year. This is the highest percentage in 14 years since relevant statistics were first recorded in 2009. In 2017, this figure was at 32.3 percent, and it has increased by 10 percentage points in just five years.
The overall interest coverage ratio for all companies stood at 348.57 percent last year, which experienced a significant decrease of nearly 100 percentage points compared to the previous year’s 487.90 percent. The interest coverage ratio is an indicator that shows the extent to which financial expenses can be covered by income generated through operating activities. If it is below 100 percent, it means that the company is spending more on interest costs than it is earning. The interest coverage ratio has declined as corporate operating profit margins have decreased and the burden of financial expenses has risen.
There is also a noticeable phenomenon of “polarization” among companies. The proportion of companies that earned more than five times their interest costs decreased to 34.2 percent last year, down from 38.2 percent a year earlier. This means that among all companies, the percentage of financially stable companies has declined.
Other indicators reflecting actual financial stability are also concerning. Last year, the debt ratio of companies increased to 122.3 percent and the dependency on borrowed funds rose to 31.3 percent compared to the previous year. Excluding the substantial operating losses experienced by Korea Electric Power Corporation and Korea Gas Corporation, dependency on borrowed funds increased slightly to 30.4 percent compared to the previous year’s 29.9 percent.
Against this backdrop, corporate growth and profitability have continued to deteriorate this year. The key indicator of growth, the rate of increase in revenue, dropped from 17.0 percent in 2021 to 15.1 percent in 2022.
The revenue operating profit margin, which indicates profitability, also deteriorated, falling from 5.6 percent in 2021 to 4.5 percent last year. With reduced dividend and investment returns due to factors such as the real estate market and underperformance in the capital market, the pre-tax net profit margin as a percentage of revenue also decreased by approximately 2 percentage points compared to the previous year.
Given this situation, corporate debt defaults are considered a potential risk to financial stability. With high-interest rates, the burden of repaying corporate debt is increasing, and the lackluster performance in revenue growth and operating profit margin is preventing the improvement of repayment capacity. In particular, the interest coverage ratio for small and medium-sized enterprises (SMEs) hit its lowest point in a decade in 2022, reaching 211.3 percent, surpassing the 181.0 percent level in 2012. The dependence on borrowings by SMEs reached 42.1 percent in 2022, marking the highest level since 2009. The debt ratio also rose to its highest point in seven years, at 171.3 percent, surpassing the level last seen in 2016. In the first quarter of this year, the proportion of at-risk companies facing possible default stood at 17.3 percent, an increase compared to the same period the previous year, which was 15.6 percent.
Corporate loans have been on the rise, with an increase of over 11 trillion won (US$8.12 billion) in September alone. As of the end of last month, the total outstanding corporate loans in the banking sector amounted to 1,238.2 trillion won, with loans to SMEs reaching 994.2 trillion won, comprising a significant portion. In the first half of this year, the credit extended to South Korean companies, which includes loans and trade credits, reached 1.24 times the nominal Gross Domestic Product (GDP), surpassing the level during the Asian financial crisis, which was 1.13 times GDP.