Companies in financial distress rise by 25% on year

[Photo by Han Joo-hyung]

The number of companies in financial distress rose by 25 percent in South Korea, according to the latest study which aggregates data from more than 230 companies. The increase was attributable to high interest rates and rising financial costs that even larger companies felt the effects of alongside small and medium-sized enterprises (SMEs). Real estate across the country was the most distressed sector by some margin, the study showed.

The data revealed by the Financial Supervisory Service (FSS) on Monday showed that the country’s commercial lenders identified 231 companies with indicators of insolvency in 2023, an increase of 46 companies compared to the 185 reported in 2022 and the highest number since 2015, when 229 companies displayed the indicators.

The previous trend saw a rise in distressed companies to 210 in 2019, followed by a decline to 160 in 2021 during the COVID-19 pandemic with government aid, including extended loan maturities, contributing to this decline. But as the aid stopped after COVID-19 became endemic, the number of companies at financial risk is growing sharply again.

According to the latest data, 118 companies were assigned a C and 113 a D rating, increasing by 34 and 12 respectively from the previous year. C-graded companies face structural liquidity issues but still have the potential for recovery, while D-grade companies are most likely to default with extremely bleak signs of recovery.

Larger companies in distress rose from two in 2022 to nine in 2023, whereas the number for SMEs surged from 183 to 222.

The financial regulators said the primary cause for the surge is deteriorated profitability in 2022 due to the sluggish domestic and global economy and rising borrowing costs. High interest rates in 2023 have further exacerbated financial challenges for companies, contributing to the growing number of delinquencies.

The real estate industry was the most vulnerable to the risk of bankruptcy with 22 companies affected, a notable increase from a year ago, as more real estate developers face a greater risk associated with project financing (PF) loans.