CEO Morning Brief

South Korean ‘zombie’ Firms Surge With Rising Interest Rates

Publish date: Fri, 29 Dec 2023, 08:48 AM
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TheEdge CEO Morning Brief

(Dec 28): South Korea’s share of so-called zombie companies jumped to a record in data going back more than a decade as higher interest rates pushed more businesses beyond a key metric for servicing their debts.

Zombie companies refer to firms unable to meet all their interest payments from operating profit. Their share in the economy rose to 44.8% in the first half, compared with 37% at the end of last year, the Bank of Korea (BOK) said Thursday in its financial stability report.

Zombie firms have to go beyond their operating income to keep up with their debt repayments in the hope that profitability will return someday. On Thursday, Taeyoung E&C, one of South Korea’s biggest developers, applied for creditor-led restructuring, sending its shares tumbling at one point to the lowest price since 2010.

The rise of marginal companies underscores the corporate-sector pain of an export slump that has lasted most of this year and elevated borrowing costs as the central bank keeps its benchmark rate restrictive to combat inflation.

The BOK report separately showed South Korea’s ratio of corporate debt to gross domestic product (GDP) reached a record 125.6% last quarter. That contrasted with the share of household debt to GDP edging down to 101.4%.

The BOK report showed that larger companies were faring better overall, with 31% of them suffering from an interest coverage ratio of less than one, the bank said. About 59% of mid- and smaller-sized firms struggled to pay interest with profit, it said. The number of zombies may decrease if exports continue to recover and output improves.

While private-sector leverage remains high, the nation’s overall financial system remains stable, the central bank said. Authorities should encourage companies to reduce their exposure to property debt, it added.

Source: TheEdge - 29 Dec 2023

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