Over 900 Korean companies remained heavily indebted as of 2022

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There is a troubling trend in South Korea, where the number of financially vulnerable companies whose borrowing costs remained higher than their earnings for seven consecutive years topped 900. The trend also raised concerns that these heavily indebted companies could threaten the country’s financial stability, with their financial loans amounting to more than 50 trillion won ($37 billion) amid the possibility of prolonged monetary tightening.

The Bank of Korea noted in its latest report published on Tuesday that 3,909, or 15.5 percent, of the total 25,135 companies that received mandatory external audits become so-called “marginal firms,” or those whose interest coverage ratios were below 1 for three years, in 2022. The interest coverage ratio is calculated by dividing a company’s earnings by its interest expense during a given period, and a ratio below 1 means the company’s interest payments are higher than its earnings.

Long-term marginal firms whose ratio has remained below 1 for seven years accounted for 23.1 percent of this vulnerable group. One-fifth of smaller businesses, such as cleaning and travel agencies, were long-term marginal firms, accounting for 19.6 percent of the total. Sectors requiring a long-term investment, such as real estate and logistics, saw a considerable number of businesses with marginal earnings. While the manufacturing sector remained relatively robust, with a mere 1.8 percent, the service sector made up 5.5 percent of the total.

These heavily indebted companies also exhibited lower assets and sales at 0.67 times and 0.4 times respectively. However, there was a significant disparity when it came to debt, borrowings, and interest expenses, which were at 1.23 times, 1.47 times, and 2.32 times respectively. The marginal firms now find themselves trapped in a destructive cycle characterized by diminishing liquidity, reduced repayment capacity, and eroding stability, after ramping up their borrowings to offset their operating losses.