[Base Rate 3%] 'Big Step' Direct Hit... Even Large Corporations Struggle to Repay Interest

Declining Performance... Corporate Loan Interest Rates Expected to Reach 7%
"Monitoring Needed for Shipbuilding, Air Transport, and Distribution Sectors"

The Monetary Policy Committee of the Bank of Korea held a meeting on the 12th to decide on the direction of monetary policy and decided to raise the base interest rate, currently at 2.50%, by 0.50 percentage points in a single 'big step' increase. On this day, a notice of today's interest rate was posted on the exterior wall of a commercial bank in downtown Seoul. Photo by Moon Honam munonam@

[Asia Economy Reporter Kiho Sung] On the 12th, as the Bank of Korea's Monetary Policy Committee implemented the second ‘Big Step (0.50 percentage point hike),’ not only marginal companies and small and medium-sized enterprises but also large corporations facing a decline in performance in the second half of the year found themselves struggling even to repay interest. Pessimistic views suggest that 3 to 4 out of 10 domestic large corporations could face management difficulties.

With corporate loan interest rates expected to exceed 7%, and corporate bond rates, a key funding channel for companies, soaring sharply, borrowing money has become even more difficult. On top of this, adverse factors such as the sharp rise in the won-dollar exchange rate, accelerated U.S. monetary tightening, and unstable global conditions are pouring in, but companies that had entered emergency management are unable to even gauge how to change their future management strategies.

According to the Bank of Korea, the interest burden on companies when implementing the Big Step amounts to about 8.9 trillion won. The interest increase immediately following the base rate hike on this day reached 18 trillion won. Previously, the Federation of Korean Industries surveyed the financial conditions of manufacturing companies among the top 1,000 companies by sales and found that the average base rate threshold at which operating profit can cover interest expenses was 2.6%. Looking at the proportion of companies by base rate threshold, 37.0%, or more than 3 out of 10 companies, responded that they already find it difficult to cover interest expenses with operating profit at the current base rate.

If the Bank of Korea takes a ‘Baby Step’ (0.25 percentage point base rate hike), 5 out of 10 large corporations will become vulnerable companies, and if the base rate reaches 3.0% with a Big Step, the number of vulnerable companies will reach 59.0%. According to this analysis, it means that the majority of large corporations will also face a crisis.

The aviation industry among large corporations has been hit the hardest. Already weakened financially due to COVID-19, they had been holding on through capital increases and corporate bond issuance. However, with the recent surge in exchange rates and fuel costs compounded by interest rate hikes, red flags have been raised in management.

The electronics and automobile industries are also anxiously concerned about the impact of reduced purchasing power leading to consumption contraction. An automobile industry official said, "With global high interest rates maintained, especially in the U.S. market where many vehicles are purchased through loans, the entire market could shrink." The electronics industry also stated, "If high interest rates continue along with a high exchange rate, there is concern about stagflation," adding, "Ultimately, it is not just the interest rate hikes and high exchange rates themselves but the macroeconomic crisis's adverse effects on management that are expected to be significant, and we are maintaining a sense of crisis."

The soaring corporate bond rates, a funding channel for companies, are also worsening financial conditions. As the base rate hike causes government bond yields to rise, corporate bond issuance rates are climbing steeply. As of the previous day, the 3-year unsecured corporate bond rate for AA-rated companies recorded 5.44% annually, up 2.98 percentage points from 2.46% at the beginning of this year.

Korea Credit Rating recently reported that after re-examining the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to interest expenses for 18 industries next year under revised interest rate hike assumptions, the ratio decreases from 10.8 times to 8.3 times. This means that corporate profits relative to interest expenses are dropping from 10 times to 8 times, indicating an increase in interest expenses.

Korea Credit Rating estimated that industries such as shipbuilding, hotel duty-free, air transportation, distribution, private power generation, and shipping will continue to have relatively low ratios compared to other industries and designated them as ‘industries requiring monitoring.’

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