The Bank of Korea: "US Companies' Financial Distress Deepens Due to COVID-19... Impact on Economic Recovery"

Bank of Korea Overseas Economic Focus

[Asia Economy Reporter Kim Eunbyeol] Although economic activities that had stopped due to the novel coronavirus infection (COVID-19) in the United States are resuming, the momentum for economic recovery is weak, and many companies are expected to become insolvent.

On the 14th, the Bank of Korea stated in its 'Overseas Economic Focus' report, "The liquidity shortage of U.S. companies caused by COVID-19 is being resolved through active government support, but the improvement is differentiated depending on individual industries and whether they are eligible for support."

By industry, companies in ▲energy (crude oil, petroleum products, etc.) ▲industrial goods (aviation, machinery equipment, etc.) ▲cyclical consumer goods (lodging, food service, automobiles, etc.) showed relatively poor performance. By characteristics, highly leveraged, low-credit, and low-profit companies were relatively weak.

In particular, energy, industrial goods, and cyclical consumer goods sectors were estimated to be relatively vulnerable to short-term liquidity shortages and had high debt repayment burdens. Many companies in these vulnerable groups had interest coverage ratios below 1 (companies unable to cover interest expenses with operating profits), indicating a high possibility of insolvency in the future. The quality of debt was also deteriorating, with an increasing proportion of high-interest speculative-grade corporate bonds centered on these vulnerable industries.

Corporate debt in the U.S. has risen to 74% of gross domestic product (GDP), reaching levels seen during the 2008 financial crisis. Speculative-grade corporate bonds and leveraged loans account for about 20% of total corporate debt.

A Bank of Korea official said, "Assuming companies raise all their insufficient funds through debt, the proportion of highly leveraged companies is expected to increase about threefold from the previous year to 18.9% this year," adding, "Companies with higher leverage ratios are more likely to face credit rating downgrades, which could further increase difficulties in raising funds."

Furthermore, the official emphasized, "Despite large-scale financial support, if economic recovery is delayed and the possibility of insolvency among U.S. companies increases, negative impacts on the real economy will intensify," and "If the poor performance of U.S. companies prolongs, zombie companies will proliferate, restructuring will be delayed, and growth potential may decline."

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