More than four out of 10 listed companies in Korea were unable to pay interest with money they made, according to a recent survey. High interest rates and stagflation worsened the business environment, raising red flags on their financial conditions.
As of the third quarter of 2023, 710 of 1,674 listed companies in the KOSPI and KOSDAQ stock markets posted an interest coverage ratio of less than 1 and they included those which posted operating losses, according to financial information firm FnGuide. They accounted for 42.4 percent, up 8.1 percentage points from 34.3 percent a year ago and up from 39.9 percent in the third quarter of 2020, when the COVID-19 pandemic hit.
An interest coverage ratio is calculated by dividing a company’s operating income by its financial expenses (interest expenses) and is one of the indicators of a company’s ability to pay its debt. For example, an interest coverage ratio of less than 1 indicates that a company’s operating income is not enough to cover its interest payments.
In 2023, as interest rates rose, more companies saw red flags on their financial health. The construction industry was one of the first to sound the alarm. According to FnGuide, as of the third quarter of last year, about half (25) of the 53 construction companies listed on the stock market had interest coverage ratios below 1. This included Taeyoung Engineering & Construction, GS Engineering & Construction, and Shinsegae Engineering & Construction, which were among the top 30 Korean construction companies in terms of civil engineering and construction capacity.
This plight is not limited to the construction industry. Some large Korean business groups are also facing interest pressure from high-interest loans. Among companies with a market capitalization of more than US$2 trillion (top 150 firms), SK hynix, LG Display, Lotte Chemical, Netmarble, and E-Mart posted interest coverage ratios below 1.
The problem is vulnerable companies that logged interest coverage ratios below 1 for three consecutive years. These companies included Hanjin KAL, Hyundai Mipo Shipbuilding, and HD Hyundai Heavy Industries.
Many experts predict that the number of zombie companies that cannot pay interest with their earnings will climb in 2024 as it did in 2023. While the pace of lending rate hikes has slowed down, concerns about stagflation have not abated. The rate on three-year AA corporate bonds was 3.977 percent per annum on Jan. 4, down 1.285 percentage points from 5.262 percent at the beginning of last year, according to the Korea Financial Investment Association.