Corona 2 Years... Large Corporations Borrowed 10 Trillion More

Interest Rates Rise but Surge Is Unusual
Flight to Safety as Corporate Bond Market Freezes
Concerns Over Risks Amid Rate Hike Period

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[Asia Economy Reporter Sung Kiho] It has been revealed that the amount of money borrowed by large corporations from banks over the two years following COVID-19 has exceeded 10 trillion won. The increase in large corporate loans is interpreted as a result of increased demand for funds due to liquidity securing and the recovery of corporate investment sentiment. It is also analyzed that banks changing their business strategies to expand corporate loans due to household loan regulations contributed to this. However, concerns have arisen that the increase in large corporations with deteriorated financial soundness due to COVID-19, along with worsening loan repayment conditions such as interest rate hikes, could adversely affect bank soundness.

According to the financial sector on the 5th, the outstanding large corporate loans of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup Bank) totaled 82.4093 trillion won last year. This is an increase of 4.0736 trillion won compared to 78.3357 trillion won at the end of the previous year. Although this is less than the net increase of 6.2565 trillion won in 2020, it is a significant increase compared to the 3.0526 trillion won decrease in 2019 before COVID-19. Over two years, large corporations borrowed a total of 10.3301 trillion won from banks.

Last year, large corporate loans showed a high growth rate in the second half. Large corporate loans, which were 81.6911 trillion won at the end of October, recorded the largest monthly increase last year by rising to 84.2635 trillion won at the end of November. Typically, large corporations repay debts at the end of the year to manage financial soundness. This explains why large corporate loans decreased month-on-month in December 2020 and last year.

It is particularly unusual that loans increased despite the rise in benchmark interest rates and consequently higher bank loan interest rates from the second half of last year. Large corporations usually prefer direct financing such as corporate bonds, which offer more favorable interest rate conditions than bank loans, but they borrowed from banks during the interest rate hike period. The prevailing analysis in the market is that the corporate bond market freeze had a significant impact. According to the Korea Financial Investment Association, corporate bond issuance in November last year was 5.8 trillion won, down 1.8 trillion won from the previous month. The decline in demand for credit products due to rising interest rates led to sluggish corporate bond issuance. Recently, as market interest rates rose, the corporate bond interest rate for ‘AA’ rated 3-year bonds surged to 2.580% in November last year, marking the highest level in three and a half years.

The financial structure of large corporations has also significantly weakened. According to data submitted by the Financial Supervisory Service to Yoon Changhyun, a member of the People Power Party, it was confirmed that among the 32 large corporate groups selected by the Financial Supervisory Service last year, seven signed a Financial Structure Improvement Agreement (an implementation plan in which companies needing financial structure improvement promise their main creditor banks to reduce debt and increase profitability). Companies that sign this agreement are managed by creditor banks for three years. The number of companies signing such agreements changed from a decreasing trend to an increasing trend: six in 2017, five in 2018, four in 2019, and four in 2020. The financial sector interprets this as evidence that the financial structure of some large corporations weakened last year.

The problem is that the trend of interest rate hikes is expected to continue. With expectations of at least two benchmark interest rate hikes in the first half of this year, the debt burden on companies is also increasing.

An official from a commercial bank said, "If corporate bond issuance tightens due to interest rate hikes and loan interest rates also rise, companies facing difficulties in raising funds may appear," adding, "If corporate performance does not improve, the burden of debt repayment will increase, which could negatively affect banks as well."

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