BOK digs into state of most vulnerable firms

The financial vulnerability of underperforming companies has worsened over the past five years, according to a study by the Bank of Korea released Sunday.

Although Korea Inc. has been undergoing corporate restructuring to lower the risk of struggling businesses with overwhelming debt, the potential remains of businesses defaulting amid a difficult climate, including a glum economic outlook and interest rate hikes.

The BOK said that the number of so-called marginal companies steadily increased to reach 4,252 as of the end of 2015, accounting for 16.9 percent of all Korean companies.

The central bank classified underperforming companies into three categories: marginal, chronically marginal and default risk enterprises.

Marginal companies refers to companies with interest coverage ratios of less than 100 percent, while chronically marginal companies have had ratios below 100 percent at least twice since 2001. The lower a company’s interest coverage ratio is, the bigger its debt burden.

The number of chronically marginal companies stood at 2,804, 11.2 percent of all Korean companies. Default-risk companies - which survive on loans with little chance of being turned around - totaled 243 in 2015, 1 percent of all companies.

Although the default risk companies are small in number, their rate of increase was the highest among the three categories. They jumped an average of 10.9 percent annually between 2008 and 2015, according to the study.

The number of marginal companies rose 10.5 percent between 2008 and 2015 and chronically marginal companies 8.3 percent.

The vulnerability index of marginal companies had been on a decline throughout the 2000s after peaking early in the decade, but started rebounding in 2011.

As for chronically marginal enterprises, the index spiked in 2009-2010 in the wake of the global financial meltdown.

The central bank analyzed that the pattern of the vulnerability indexes correlates with the rate of dishonored bills, referring to financial instrument whose payment has been refused.

When measuring the companies’ vulnerability, the BOK incorporated “both principal component analysis and dynamic factor analysis with indicators from IMF’s CVU (Corporate Vulnerability Utility), the report said.

By sector, the machinery and equipment manufacturing companies took up the highest portion of 12.2 percent, followed by the automobile sector at 12.1 percent.

Audio and telecommunications equipment makers ranked third with 11.1 percent, followed by metal product manufacturing.

The approach, the central bank explained, is to supplement a conventional method of measuring insolvency.

“It is usually thought that higher debts of a company tend to increase the risk of insolvency,” said Choi Young-joon, the BOK researcher who wrote the report.

“In the case of Korea, the debt-to-equity ratio seems to have been stable after the Asian financial crisis thanks to the regulatory effort of reducing companies’ debt-to-equity ratio below 200 percent.”

The report went on to say that the debt-to-equity ratio alone, therefore, is not sufficient to measure corporate vulnerability.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]