'Frozen Corporate Bond Market' Cash Drought Pushes Large Corporations to Use 'Matong' Credit Lines

Corporate Bond Market Freezes, Funding Emergency... Bank Sector Utilizes Credit Line Loans
Next Month's Maturing Corporate Bonds Total 6.5495 Trillion Won, Risk of Real Economy Shock Transferring to Finance

[Asia Economy Reporter Jo Gang-wook] Due to the spread of the novel coronavirus infection (COVID-19) crisis, large corporations are unusually extending their reach to bank loans. Even large corporations that have traditionally raised funds in the direct finance market are now showing signs of tightening in the capital markets such as corporate bonds, leading them to actually use the previously arranged credit lines. With the maturity of corporate bonds flooding in next month, the so-called 'April liquidity crisis theory' is emerging, increasing the possibility that the shock to the real economy could spill over into a financial crisis.

According to the financial sector on the 24th, the outstanding loans to large corporations from the five major domestic commercial banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?amounted to 78.6731 trillion won as of the 20th of this month. This is an increase of about 6.6 trillion won in just over three months from 72.0791 trillion won at the end of last year. The outstanding loans to large corporations continued to rise, reaching 73.819 trillion won at the end of January and 74.6073 trillion won at the end of February. The increase has been steep this month. As of the 20th, the increase was 1.7819 trillion won, more than double the increase in February (788.3 billion won). It also exceeds the increase in January (1.7399 trillion won). Large corporations typically raise funds in the direct finance market through instruments like corporate bonds, so the recent surge in bank loans is considered unusual. In fact, the outstanding loans to large corporations from the five major banks decreased by 512.3 billion won from 74.3313 trillion won in January 2018 to 73.819 trillion won in January this year, two years later.

In particular, due to the rapid cooling of the corporate bond market recently, large corporations are actually using the credit lines they had previously arranged as a precaution. This is similar to individuals opening overdraft accounts for emergencies but not using them until suddenly needing cash and then actually borrowing from the overdraft.

The financial soundness of domestic companies has already been rapidly deteriorating along with a slowdown in performance. According to the Bank of Korea's Financial Stability Report, the corporate debt ratio was 77.6% at the end of June last year, up 2.3 percentage points from 75.3% at the end of the previous year. The proportion of companies with a debt ratio exceeding 200% (12.5%) also rose compared to 11.3% at the end of the previous year. The interest coverage ratio, which indicates a company's ability to pay interest, halved from 9.0 in the first half of 2018 to 4.4 in the first half of last year. The proportion of companies with an interest coverage ratio below 1 was 37.3%. This means that about 4 out of 10 companies are unable to pay even their interest despite earning money.

Among large corporations that have raised funds in the direct finance market through corporate bond issuance, the sense of crisis is intensifying. In particular, the amount of corporate bonds maturing next month is 6.5495 trillion won, the largest volume for April since the Korea Financial Investment Association began compiling statistics in 1991. Including April, the total amount of corporate bonds maturing by the end of this year reaches 38.372 trillion won. If the maturity of corporate bonds cannot be extended, companies must raise cash to return the investment to bondholders. This is why the government, together with the banking sector, has urgently established a bond market stabilization fund exceeding 10 trillion won.

A financial sector official said, "As large corporations are blocked from raising funds in the corporate bond market, it is understood that they are actually using the credit lines they had taken out to secure liquidity," adding, "This is not limited to any particular industry but appears to be happening across all sectors to secure liquidity through credit lines."

This content was produced with the assistance of AI translation services.