Major Corporations Even Use 'Matong'... Emergency Fundraising Amid Market Cooling (Comprehensive)

Corporate Bond Market Freezes, Bank Sector Uses Credit Line Loans
Next Month's Maturing Corporate Bonds 6.5495 Trillion Won... Highest April Level
Concerns Over Real Economy Shock Transferring to Financial Market

[Asia Economy Reporter Kangwook Cho] 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 been raising funds in the direct finance market are now actually using their previously arranged credit lines as signs of tightening in the capital markets, such as corporate bonds, have appeared. With the maturity of corporate bonds flooding in next month, the so-called 'April liquidity crisis theory' has emerged, increasing the possibility that the shock to the real economy will spill over into a financial crisis.

According to the financial sector on the 24th, the outstanding loans to large corporations by 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 steadily increased to 73.819 trillion won at the end of January and 74.6073 trillion won at the end of February, with the increase up to the 20th of this month reaching 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 by the five major banks decreased by 51.23 billion won from 74.3313 trillion won in January 2018 to January this year, two years later.

Typically, large corporations reduce loans at the end of the year to improve financial soundness on their financial statements and then increase them again at the beginning of the following year. Because of this, large corporate loans generally increase sharply in January and then decrease, maintaining a certain scale, but this year they have continued to increase, rising by 6.6 trillion won compared to the end of the year.

In particular, as the corporate bond market has recently frozen, causing an emergency in large corporations' fundraising, the rapid increase in bank loans to large corporations is analyzed to be due to the actual use of pre-arranged credit lines. This is similar to individuals opening overdraft accounts as a precaution for emergencies but not using them until suddenly needing cash and then actually borrowing from the overdraft account.

Domestic companies' financial soundness has already rapidly deteriorated 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 increased compared to 11.3% at the end of the previous year. By company size, both large corporations (12.2% → 13.4%) and small and medium enterprises (10.3% → 11.6%) increased compared to 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 four out of ten companies are unable to pay interest even though they are earning money.

Also, according to the Financial Supervisory Service, the corporate loan delinquency rate rose by 0.05 percentage points to 0.51% compared to 0.45% at the end of the previous month. The problem is that this delinquency rate statistic is from before the COVID-19 shock fully materialized. Since February this year, the COVID-19 crisis has dealt a direct blow not only to manufacturing but also to the service industry, increasing concerns about rising delinquency rates.

With the acceleration of the COVID-19 pandemic worldwide, even the global capital markets have contracted, heightening the sense of crisis among large corporations that have been raising funds in the direct finance market through corporate bond issuance. 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 corporate bonds maturing by the end of this year reach 38.372 trillion won. If the maturity of corporate bonds cannot be extended, companies must raise cash to return the investment to bondholders. For this reason, the government has also urgently established a bond market stabilization fund of more than 10 trillion won jointly with the banking sector.

A financial sector official said, "It is understood that large corporations, whose fundraising in the corporate bond market has been blocked, are actually using the credit lines they had taken out within limits to secure liquidity," adding, "This is not limited to any particular industry but appears to be happening across all industries to secure liquidity through credit lines."

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