"Slower Exit Speed of Distressed Companies Amid Prolonged COVID-19"

September Financial Stability Status by Bank of Korea on the 24th

[Asia Economy Reporter Jang Sehee] Due to the impact of the novel coronavirus infection (COVID-19), the number of marginal companies that cannot even pay interest with the money earned this year is expected to increase by 44.8% compared to last year, which was the highest ever. This has led to an analysis that the speed of existing marginal companies being phased out has slowed down due to COVID-19.

According to the Bank of Korea's 'September Financial Stability Report' on the 24th, among 23,494 externally audited companies this year, 5,033 companies (21.4%) are diagnosed as marginal companies. This is a 44.8% increase from last year (3,475 companies), the highest since related statistics began in 2010. Marginal companies refer to companies that have been unable to pay interest expenses with their annual earnings for three consecutive years.

The default risk of marginal companies has also increased. The expected default probability of marginal companies soared to 4.1% as of June this year. This is 2.5 times higher than that of non-marginal companies (1.7%), and has risen sharply compared to 3.1% in December 2018 and 3.2% in December last year.

In response, Professor Andonghyun of Seoul National University’s Department of Economics said, "As COVID-19 continues, the number of companies entering marginal status has increased," adding, "While the total volume of marginal companies is important, attention should be paid to the slowed pace of their exit." Professor An also suggested that restructuring should be carried out considering sales, net income, and operating profit as solutions.

Additionally, as the possibility of insolvency in overseas commercial real estate has increased after COVID-19, the potential losses from overseas alternative investments by domestic financial institutions have also grown.

According to the report, the scale of overseas investments by domestic financial institutions reached 486 trillion won as of the end of June this year, which is 3.8 times the amount at the end of 2013 (129 trillion won), when overseas investments began to increase rapidly. Overseas investments by non-bank institutions such as securities and insurance companies accounted for 91.8% of the total increase in overseas investments by all financial institutions from 2014 to June this year.

Among all overseas investment assets, bonds and stocks account for most, with 210 trillion won (43.2%) and 176 trillion won (36.2%) respectively, but overseas alternative investments also showed a steep growth rate of 21.1% annually on average from 2014 to June this year, reaching 100 trillion won.

A Bank of Korea official stated, "Alternative investments such as overseas real estate are typically long-term investments with low liquidity, and it is difficult to quickly sell assets even when market conditions deteriorate, which may lead to accumulated insolvency." The official added, "In particular, securities companies not only invest their own capital but also resell a significant portion of overseas alternative investments to institutional or individual investors to earn profits, so related liquidity risks or investor losses may occur."

In this regard, Professor An predicted, "If the vacancy rate of commercial real estate increases and its value declines accordingly, a few large securities companies could be shaken."

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