‘Zombie’ companies can’t even pay interest

Back in better days, Korea’s Keangnam Enterprises built Southeast Asia’s second-tallest skyscraper, two years after posting record operating profits.

Now, the Asan-based company is trying to sell the 72-story building, constructed in Vietnam’s capital of Hanoi in 2011, and in April, its shares were delisted after it filed for receivership.

Keangnam Enterprises is among the growing number of companies whose operating income doesn’t cover loan interest expenses as expansion in Asia’s fourth-largest economy slows, posing a “significant risk” to the asset quality of local lenders, Moody’s Investors Service says. Firms with incomes falling short of debt servicing costs for three straight years rose to 3,295 in 2014, or 15.2 percent of the total, from 12.8 percent in 2009, according to the Bank of Korea.

The central bank, which has cut rates to a record low and trimmed its 2015 economic growth forecast to 2.8 percent, has said some of these companies, labeled hangye or “marginal” in Korean, may be staying alive by taking advantage of low borrowing costs to pile on more debt. Loans to shipbuilders, steelmakers and shippers pose the biggest threat to banks, according to Moody’s.

“These zombie companies have increased because restructuring has been delayed,” said Jeong Dae-hee, a fellow in the macroeconomic policy department at state-run think tank Korea Development Institute. “This may hinder the dynamics of economic growth in the long term.”

Sung Wan-jong, the then-head of Keangnam Enterprises, was found hanged in April, leaving behind a memo in which he detailed an illegal cash payoff he said he’d made to politicians including former Prime Minister Lee Wan-koo. Lee, who denied taking the money, resigned that month over the allegation.

Keangnam Enterprises had an operating loss of 247 billion won ($216 million) in 2014, after losing 243 billion won the previous year, its financial accounts show. The company’s interest expenses were 137 billion won last year and 117 billion won in 2013.

Ssangyong Engineering & Construction, another marginal company and the builder of the Marina Bay Sands Hotel in Singapore, filed for court receivership in 2013 and was bought by Investment Corp. of Dubai in March.

Sambu Construction, which tried to sell its Renaissance Seoul Hotel in the Gangnam District to repay debt, said on July 9 it failed to make the sale because it couldn’t accept the terms the preferred bidder offered.

Measures of Korean banks’ asset quality suggest they’re “not in a bad situation at the moment,” Bu Sang Don, an economist at the Bank of Korea, said. “Having said that, with the continued economic slowdown, there’s concern that increasing numbers of marginal companies may potentially pose a risk to banks.”

Combined newly classified bad debt of Korean banks was 4.4 trillion won in the first quarter, down from 6.7 trillion won in the final three months of 2014, Korea’s Financial Supervisory Service said in a May 26 statement.

Non-performing loan ratios rose one basis point to 1.56 percent in the first quarter, according to the FSS.

Among Korea’s seven biggest lenders, loans to shippers, shipbuilders, construction firms and steelmakers - among the riskiest borrowers - comprised more than 12 percent of their loans, according to Moody’s. State-backed lenders Export-Import Bank of Korea and Korea Development Bank had higher exposures, the ratings company said.

Despite four central bank interest rate cuts since August, Moody’s doesn’t expect a meaningful improvement in marginal companies’ interest-servicing abilities because their revenues and profits have also been declining, Sophia Lee, a senior analyst at the firm, wrote in a note dated July 2.

Total debt held by companies on Korea’s Kospi index has increased 22 percent in the past three years to 1,132 trillion won, according to data compiled by Bloomberg.

Big companies with incomes that fell short of debt servicing costs made up 14.8 percent of all such firms compared with 9.3 percent in 2009, according to the BOK. That was a faster increase in the ratio than for small- and mid-sized companies, according to the central bank.

“More corporate restructuring should’ve occurred after the financial crisis but with abundant liquidity from global monetary easing, restructuring has been put off worldwide,” said Lee Ji-eun, a senior research fellow at the Korea Institute of Finance.

Bloomberg