Companies on the Brink Ahead of Big Step "Could Be Driven to the Worst-Case Scenario"

If the Bixtep by the Bank of Korea Becomes Reality
Loan Interest Burden Increases Sharply
When Funding Interest Rate Rises by 1%P
Temporary Marginal Firms Increase by 5.4%P

The KOSPI opened at 2,481.66, up 34.28 points (1.40%) from the previous trading day. On the 16th, employees at the Hana Bank dealing room in Jung-gu, Seoul, were monitoring news related to the US Federal Reserve's interest rate hike while working. The KOSDAQ index started at 812.95, up 13.54 points (1.69%), and the won-dollar exchange rate opened at 1,278.0 won, down 12.5 won. Photo by Kim Hyun-min kimhyun81@

[Asia Economy reporters Kiho Sung, Daeyeol Choi, Chaeseok Moon, Jonghwa Kim] A industrial complex development specialist company, A Industrial Complex Co., Ltd., is recently struggling with the final construction of the industrial complex due to a funding shortage. They need to receive interim payments from tenant companies to proceed with additional construction, but the companies are unable to secure loans and are requesting extensions on payment deadlines. The additional required funds amount to about 20 billion KRW. Although they want to take out loans directly to continue construction, banks are demanding additional collateral, putting them in a difficult situation.

Cho Hyunsoo (pseudonym, 70), CEO of A Industrial Complex, said that when the complex was completed last November, with an interest rate of 2%, he provided collateral of his entire assets worth 50 billion KRW and borrowed 25 billion KRW, investing all of it into the complex development, so he has no more capacity left. Cho said, "Now that interest rates have jumped to 4.5%, the financial burden has increased seriously. Just a few years ago, collateral value was recognized at about 70-80%, but now only exactly 50% is acknowledged," adding, "The value of the construction invested so far is not recognized as credit, only collateral is demanded, which is frustrating."

U Company, a cosmetics manufacturer located in Anyang, Gyeonggi Province, is sighing over increased costs. They export products to China and import raw materials, but since China’s lockdown this year, they have had to find detours to import raw materials and deliver products, causing logistics costs to more than double. On top of that, interest rates have risen, making them anxious even after applying for loans. CEO Shin Jaepil (pseudonym, 47) said, "Raw material prices have risen this year, and logistics costs have become exorbitant, to the point that wages are delayed," adding, "The bank says interest rates will exceed 6% next month, which is about three times higher than at the end of last year. I’m afraid to take out loans."

The U.S. has taken the strongest measure in 28 years by raising the benchmark interest rate sharply, increasing worries among domestic companies. As the Bank of Korea’s rate hike becomes inevitable, financial institutions’ loan interest rates are bound to soar. Consequently, companies that have significantly increased debt due to the COVID-19 impact or are surviving on debt face an urgent crisis from rapidly rising interest burdens.

According to the industry on the 16th, the U.S. Federal Reserve (Fed) implemented a ‘giant step’ interest rate hike of 0.75 percentage points on the 15th (local time), deepening banks’ concerns over a ‘big step’ (0.50 percentage point increase) rate hike.

If the Bank of Korea’s big step materializes, companies on the brink could face a crisis. The Federation of Korean Industries (FKI) recently analyzed 17,827 companies subject to external audits and found that 34.1% were temporary marginal companies whose operating profits were less than interest expenses last year.

FKI pointed out that if the funding rate rises by 1 percentage point, the proportion of temporary marginal companies increases by 5.4 percentage points. Accordingly, if the funding rate rises by 3 percentage points due to interest rate changes, the proportion of temporary marginal companies increases to 47.2% (a 13.1 percentage point rise). This means nearly half of companies cannot cover interest payments with operating profits.

Interest rate hikes will inevitably have adverse effects on large-scale mergers and acquisitions (M&A) issues such as Daewoo Shipbuilding & Marine Engineering, Asiana Airlines, and Ssangyong Motor. Asiana, for example, had borrowings of 34.163 trillion KRW due within one year as of the end of last year. Adding about 4 trillion KRW in perpetual bonds, the repayment cost this year exceeds 38 trillion KRW. If benchmark interest rates rise and interest payments increase, the burden on companies hoping to acquire will only grow.

An industry insider said, "Not only has the burden on existing debt increased, but difficulties in raising funds are expected." Another insider said, "We will consider countermeasures such as reducing bank borrowings and increasing the proportion of fixed interest rates."

Yoo Jungjoo, head of the corporate policy team at the Federation of Korean Industries, said, "Interest rate hikes will lead to economic contraction, and as a result, not only small and medium enterprises but also many large companies are likely to experience temporary management difficulties," adding, "Especially for companies facing large-scale M&A, the government needs to clarify its stance on how to handle the situation."

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