[Financial Stability Status] 15.3% of Marginal Firms Unable to Cover Interest with Operating Profit for 3 Years... 'Record High'

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

[Asia Economy Reporter Jang Sehee] The proportion of marginal companies that cannot pay interest despite earning money for three consecutive years reached 15.3%, setting a new record high. As the economic downturn caused by COVID-19 continues, the number of companies unable to repay interest is rapidly increasing.

According to the 'Financial Stability Report as of September 2021' released by the Bank of Korea on the 24th, the proportion of marginal companies among externally audited companies last year is estimated to have risen by 0.5 percentage points from the previous year to 15.3%. This is the highest level since statistics began in 2010.

The number of marginal companies decreased from 3,475 to 3,465, influenced by the implementation of the new External Audit Act (New External Audit Act), which reduced the number of externally audited companies analyzed by 807 compared to the previous year. Marginal companies refer to those with an interest coverage ratio below 1 for three consecutive years.

The problem is that the debt of these marginal companies is also increasing sharply. The debt of marginal companies reached 124.5 trillion KRW, an increase of 9.1 trillion KRW compared to the previous year. Recent trends show a continuous increase over four years, recording 100.2 trillion KRW in 2017, 105.3 trillion KRW in 2018, and 115.4 trillion KRW in 2019. The proportion of total debt of externally audited companies also rose by 0.6 percentage points to 15.6% compared to the previous year.

By company size, small and medium-sized enterprises (SMEs) showed a higher proportion (16.2%) than large corporations (11.5%) by 4.7 percentage points. However, in terms of net change, large corporations increased by 39 companies, while SMEs decreased by 49 companies. Debt also showed that large corporations recorded 5.6 trillion KRW, which is 2.1 trillion KRW more than SMEs at 3.5 trillion KRW.

By industry, the proportion of marginal companies was high in accommodation and food services (43.1%), shipbuilding (23.6%), and transportation (22.6%). The prolonged COVID-19 situation and social distancing measures caused shocks such as a 4.7 percentage point increase in the accommodation and food service sector compared to the previous year.

Although not yet marginal companies, the proportion of vulnerable companies with an interest coverage ratio below 1 was 19.9%, slightly exceeding the past five-year average (16.6%). Their debt also recorded 20.4%, which is 3.6 percentage points higher than the past five-year average (16.8%).

The proportion of companies that became vulnerable for the first time last year due to operating losses caused by the COVID-19 shock was 14.8%, significantly higher than the past (2015?2019) average of 11.7%.

The Bank of Korea stated, "Since 2018, the proportion of marginal companies has been increasing, and the entry of large corporations into marginal company status is also rising." It added, "Considering that the average debt per company is about 10 times higher for large corporations than for SMEs, attention should be paid to the potential deterioration of financial institutions' asset soundness due to non-performing loans."

Regarding the average debt per marginal company, large corporations and SMEs recorded 150.9 billion KRW and 16.4 billion KRW, respectively.

Furthermore, the Bank of Korea emphasized, "Even companies that are currently non-marginal as of 2020 should be noted for the increase in candidate companies that could become marginal companies if shocks occur in the future."

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