High Interest Rates Lead Companies to Reduce Debt... Financing Down 31%

Funding of 124.7 Trillion Won from January to November Last Year
Bank Loan Balance Increased by 83.4 Trillion Won Compared to Previous Year
SMEs Reduced Loans More Than Large Corporations

As high interest rates persist and the economic situation worsens, it has been revealed that the scale of corporate financing significantly decreased last year. The corporate finance market is expected to face difficulties this year as high interest rates are anticipated to continue.

According to KDB Industrial Bank and the Bank of Korea on the 13th, from January to November 2023, the scale of corporate financing through the domestic corporate finance market amounted to 124.7 trillion won (based on net change), a decrease of 56.5 trillion won (31.1%) compared to 181.2 trillion won recorded in the same period last year.

From January to November 2023, the outstanding balance of corporate bank loans increased by 83.4 trillion won compared to the same period last year; however, this increase is 30.7 trillion won (26.9%) less than the 114.1 trillion won increase recorded from January to November 2022. By company size, loans to large corporations decreased by 9.6 trillion won, while loans to small and medium-sized enterprises (SMEs) decreased by 21.1 trillion won, indicating that SMEs reduced their borrowing more than large corporations.

The scale of direct financing, such as corporate bonds and stock issuance, also showed a shrinking trend. From January to November 2023, the net issuance of corporate bonds was 31.1 trillion won, down 14.6 trillion won compared to 45.7 trillion won in the same period last year.

As the real estate project financing (PF) market became difficult, the asset-backed securities (ABS) issuance market contracted significantly. The net issuance of ABS dropped from 6.7 trillion won in 2022 to minus 7.3 trillion won in 2023, a decrease of 14 trillion won. The issuance of special bonds also shrank the corporate bond market by about 8.6 trillion won due to a reduction in Korea Electric Power Corporation (KEPCO) bonds issuance.

From January to November 2023, the scale of financing through stock issuance also sharply declined to 10.2 trillion won, compared to 21.3 trillion won in the same period last year. This is interpreted as a result of a decrease in large-scale initial public offerings (IPOs). Due to poor demand forecasts and a slowdown in the IPO market last year, major companies such as Kurly, K-Bank, and Seoul Guarantee Insurance either withdrew their IPOs or postponed their timing.

The primary reason for the reduction in corporate financing is the prolonged high interest rate environment. Corporate loan interest rates have shown a sharp upward trend since the Bank of Korea began raising its base rate in the second half of 2021. By company size, loan interest rates for large corporations rose from 2.56% in August 2021 to 5.29% in November last year, while for SMEs, rates increased from 2.93% to 5.42%. The corporate bond market is also evaluated to have deteriorated due to concerns over economic slowdown and rising long-term interest rates.

This trend is expected to continue this year as well. Although economic growth is expected to improve compared to last year due to export recovery, the burden of loans is anticipated to persist as high interest rates continue.

The Bank of Korea’s Business Survey Index (BSI) on domestic companies’ financial conditions last month stood at 83, below the baseline of 100 and also below the long-term average of 85. The BSI for all industries in January was 69, the lowest in 11 months since February last year (69). The BSI is a statistic calculated based on corporate managers’ judgments and outlooks on current business conditions; if negative responses outnumber positive ones, the index falls below 100. This indicates that companies perceive their current business conditions as difficult and feel burdened by financing.

Yoon Kyung-soo, Senior Researcher at KDB Future Strategy Institute, stated, "Corporate loans this year are expected to increase less than last year despite a gradual economic recovery, due to increased credit risks and strengthened risk management in the banking sector. However, issuance of corporate bonds and IPOs is expected to increase as market conditions improve."

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