15% of listed Korean firms fail to service debts

Kim Yon-se

The Korea Herald

Publication Date : 06-03-2013

 

Korean listed companies’ ability to pay back their debt has deteriorated due to their worsening profitability amid slowing economic conditions.

Based on a 2012 assessment of firms listed on the stock market, Woori Finance Research Institute said Tuesday that 15 per cent, or 180 out of 1,200 firms, were found to earn less than the amount they have to pay in debt interest.

The 180 firms posted an average interest coverage ratio - a firm’s operating profit divided by its interest costs - of less than 1.

The interest coverage ratio is a barometer of how easily a company can pay interest on outstanding debt. A reading of less than 1 means a company cannot fully pay the interest with its operating profit.

Further, the percentage of “big enterprises” among the 180 firms with cash flow woes climbed to 10.6 per cent last year, while their portion stood at 6.8 per cent in 2011 and 5.4 per cent in 2010.

“In addition to small and medium enterprises, big firms are recently suffering low profitability,” said the research centre.

“While big firms saw their debt surge by 97 per cent over the past three years, the growth of their operating profit stood at 57 per cent,” it said.

FnGuide data also showed that an increasing number of large companies face risks of deterioration in their financial soundness, mostly due to external factors like the eurozone debt crisis and sluggish domestic demand.

Among them are SK Telecom, SK Hynix, LG Display, LG Uplus, LG Innotek, LG International Corp., Cheil Industries, CJ CheilJedang Corp., Hanwha Chemical, Hyundai Hysco, Hyundai Merchant Marine and Doosan Heavy Industries.

FnGuide also included several state-owned firms like Korea Electric Power Corp. and Korea Gas Corp. on the list of those facing liquidity problems.

Citing analyses from a group of brokerage houses, FnGuide predicted that the firms will suffer cash shortages in the coming months.

Korea Electric Power Corp. posted a free cash flow of 581 billion won (US$505 million) in 2011. But the state-run company was estimated to face a cash shortage of 6.8 trillion won in the latter half of 2012.

This indicates that KEPCO will have to raise 6.8 trillion won from other sources through activities such as issuing bonds to finance its business activities.

Korea Gas Corp. will also likely suffer from a cash shortfall of 2.3 trillion won.

SK Telecom is expected to see its coffers short by 1.6 trillion won in cash, Hanwha Chemical with 184.4 billion won, Hyundai Merchant Marine with 172.1 billion won and LG Display with 163.1 billion won.

Over the past few years, the proportion of listed companies, including big players and SMEs, suffering the financial difficulties continued to increase - 12.3 per cent in 2010, 13.4 per cent in 2011 and 15 per cent in 2012.