The Bank of Korea Says "Revival of Marginal Companies Should Be Evaluated Based on Long-Term Average Business Performance"

On the 21st, the Bank of Korea Announces 'Key Features of Corporate Financial Condition Transitions'

[Asia Economy Reporter Jang Sehee] The Bank of Korea has evaluated that it is preferable to assess the recovery of marginal firms based on their long-term average business performance. This is to prevent cases where temporary normalization is considered recovery, or conversely, where firms that temporarily revert to a financially vulnerable state are all excluded from recovery.

On the 21st, the Bank of Korea stated in the 'BOK Issue Note - Key Characteristics of Corporate Financial Condition Transitions' that "a significant number of firms in a marginal state each year normalize, but at the same time, a considerable number of firms that have transitioned to a normal state revert back to a financially vulnerable state."

In fact, 63.6% of marginal firms transition to a normal state within 10 years, of which 27.7% maintain a normal state after 10 years, while 35.9% revert to financial vulnerability or non-existence.

Accordingly, the Bank of Korea defined the recovery of marginal firms based on the long-term average interest coverage ratio and corporate status after newly entering marginal status, and estimated the range of recovery rates. The recovery rate of newly marginal firms between 2003 and 2009 was found to be a maximum of 36.3% and a minimum of 15.0%.

However, the Bank of Korea added, "This report defines recovered firms only as those that have maintained good business performance on average over a long period," and "Considering that the recovery criteria are relatively strict, it can be interpreted that a considerable number of newly marginal firms actually recover."

The Bank of Korea emphasized, "A significant number of firms newly transitioning to marginal status due to COVID-19 may differ in corporate characteristics such as productivity and management capability compared to past marginal firms," and "It is important to note that they may show recovery patterns different from the past."

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