The Woori Finance Research Institute announced on March 5 that the interest coverage ratio (ICR) is below one for three consecutive years for 15% of 1,200 listed companies in Korea, 228 being major corporations and the others small and midsize enterprises (SMEs), as of the end of the third quarter of 2012. This means that 180 of the surveyed companies have been unable to pay their financial expenses with their operating profits for the past three years in a row.
The percentage had increased from 12.3% to 13.4% between 2010 and 2011. At the same time, the proportion of potential marginal firms, whose ICR remains below one for the second consecutive year, went up by 5.8 percentage points to 24.2%.
SMEs took up 89.4%, or 161, of the 180 companies, meaning that their business conditions are far worse than those of large businesses. Still, the number of big businesses under the same conditions almost doubled during the same period, too. “An increasing number of major corporations have become marginal firms as their debts soared 97% between 2009 and 2012 while their operating profits increased just 54% to deteriorate their profitability significantly,” said the research institute.
The rate of increase for the past three years was the highest in the construction sector, 16.4 percentage points up, followed by manufacturing (6.7 percentage points) and steelmaking and nonferrous metal (3.5 percentage points). “If those companies that recorded a negative cash flow from operations for three years in a row are added to the statistics, the number of marginal firms will further increase,” said Lee Hyung-woo, senior researcher at the institute.
In the meantime, the Financial Supervisory Service (FSS) kicks off a project on March 11 to evaluate 200 SMEs that are currently going through corporate restructuring processes. The financial watchdog is going to decide on the fate of the firms based on its management consulting results. Applications for the consulting service are accepted from March 5. Firms that received a B (subject to the Fast-track Program), C (Work-out) or D (Corporate Restructuring) rating in the banking sector’s credit risk analysis can make the application.
The consulting process makes use of the Corporate Management Assessment System for SMEs of the Small & Medium Business Administration (SMBA), which is a three-step, company-specific reorganization program for the assessment of current conditions, provision of countermeasures and measures for recuperation. The Creditor Financial Institutions Committee (CFIC) takes part in the project along with four evaluators -- Regional Offices of the SMBA, Regional Offices of the Small & Medium Business Corporation, Korea Credit Guarantee Fund and Korea Technology Finance Corporation -- to offer the best way of business improvement, including capital increase and asset sale.
“Only the CFIC participated in the corporate restructuring program in the past, but at this time the supporting organizations will join forces with it in an attempt to yield better results,” said the FSS. The organizations is planning to provide tailored supports to those firms considered to be viable enough, such as policy funds, credit guarantee, marketing, R&D and consulting assistance while leading the others to a workout program, liquidation process, etc.