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One-tenth of Korean companies are 'zombies'.

Byline: Choi Sung-jin

One in 10 domestic businesses is a chronically marginal company, or a "zombie," that cannot generate enough cash to pay the interest on its loans, the Bank of Korea said.

Since the global financial crisis of 2008, large companies, in particular, have been turned into these corporate zombies more rapidly than smaller firms, the central bank said.

According to a BOK report on financial stability, out of the 27,995 companies that were externally audited last year, 2,561, or 10.6 percent, were chronically marginal, up 8.2 percent from the 1,851 in 2009.

Marginal companies refers to firms whose interest coverage ratio _ a measure of a company's ability to honor its debt payments, which is calculated as pre-tax earnings divided by interest payable _ is below 1 for three consecutive years. Chronically marginal companies are those that underwent this cycle twice.

Debt owed by these chronically marginal businesses amounted to 228 trillion won ($194 billion), 14.1 percent of total corporate liabilities.

Especially noticeable was the rapid increase in the number of large businesses that became corporate zombies, from 6.6 percent of the total in 2009 to 10.8 percent last year. The comparable share of small and midsize enterprises rose from 8.5 percent to 10.6 percent during the period.

The central bank attributed the steep rise in chronically marginal businesses to the inefficient corporate restructuring system. Of the businesses that went into corporate workout or rehabilitation programs from 2009-2013, 52 percent have not completed the process.

Also problematic is the government's funding support for them, it said. Credits extended to chronically marginal firms almost doubled from 22.8 trillion won in 2011 to 43.7 trillion won in June. Debts owed by "risky businesses" _ companies with an interest coverage ratio below 1 that have short-term liabilities exceeding short-term liquid assets _ also accounted for 21.2 percent of total corporate liabilities, way above the comparable share of 16.9 percent in 2009.

If a "double punch" hits the economy, meaning the nation's gross domestic product shrinks 1.5 percentage points and the interest rate rises 1.5 percentage points, the portion of risky debts will rise up to 32.5 percent, the report said, adding that financial authorities cannot rule out such a possibility if crises hit emerging economies and its effects spill over to Korea, which has become increasingly dependent on these countries.

Overall corporate debt levels are not reassuring, either. Korean businesses' core debts against the nation's nominal GDP stood at 105.3 percent, compared with the OECD's average of 97.1 percent. The rate is similar to the 104.8 percent in Japan, which experienced a long recession of "two lost decades," and is much higher than the United States (69.2 percent), the United Kingdom (75 percent) and Germany (54.5 percent).

"If the economy cools off abruptly and interest rates rise, a number of firms will experience temporary but severe liquidity problems," said a BOK official. "The government should step up monitoring and enter into a permanent restructuring mode."

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Publication:The Korea Times News (Seoul, Korea)
Date:Dec 23, 2015
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