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- Analysis of High-Interest Debt in Listed Companies: Current State and Implications [23-21]
- Research Fellow Lee, Sang Ho / Oct. 30, 2023
- The recent surge in the US benchmark interest rate and an economic slowdown in China have instigated a sense of crisis in Korea’s capital market, heavily dependent on external factors. With sluggish exports in the first half of this year, companies are grappling with a sharp decline in operating performance, intensifying market uncertainties related to worsening profitability and concerns about a debt default. Given a possible structural shift in interest rate policies, it seems challenging to swiftly dispel market uncertainties.
Despite these concerns, however, the risk of a corporate debt default spreading to the financial system remains low. This article assesses liquidity and default risks based on the assumption of operating cash flow downturns and collateral value depreciation. The results indicate a moderate increase in default risk among listed companies within a relatively stable range. Overall, there is no major concern regarding the financial soundness in the corporate sector. However, it is urgently necessary to identify and respond to micro-level issues, particularly in vulnerable sectors such as utilities and construction.
Conversely, the persistence of slowed growth necessitates a more profound discussion. Korean companies, affected by major crises like the 1997 Asian financial crisis and the 2008 global financial crisis, have prioritized debt soundness. Although debt financing costs have been on the decline over the past decade, corporate financial structure policies have neither gone beyond securing soundness through debt reduction nor fully utilized debt to realize the opportunity for growth.
Amid soaring interest rates and expanding credit risk in the private sector, it is commendable that Korea’s corporate sector has the capability to navigate the impending crisis systematically. Even in the current situation, it is worth considering effective debt management strategies from a forward-looking perspective. Companies that maintained financial soundness and entered a growth phase have proactively reduced debt during the low interest rate phase. To harness debt effectively, they should comprehensively examine diverse internal and external factors for enhancing growth potential.
- M&A in Korea: Characteristics and Implications from the Perspective of Acquirers [23-16]
- Senior Research Fellow Park, Yong Rin / Aug. 24, 2023
- Recently, the Korean M&A market has captured the attention of market participants due to regulatory authorities unveiling plans to enhance support for corporate M&A. As one of the classic investment and growth strategies of businesses, M&A effectively allocates investment opportunities to assist firms in securing growth prospects and plays a critical role in improving economic dynamics and industry structure. Based on the detailed data on domestic M&A deals, this report carried out a comprehensive and quantitative analysis on the current state and characteristics of Korea's M&A market. Additionally, it analyzed the key financial indicators that could influence deal participation from the perspective of acquirers.
According to the analyses, the Korean M&A market saw the deal size growing steadily between 2010 and 2022, and a significant part of the market has been driven by deals between buyers and sellers, and of non-listed businesses. On another note, the market has also witnessed increased participation by financial investors, including private equity. It seems that the higher valuation multiples in Korean M&A deals were influenced by several factors, including increased investment sources, larger acquisition financing due to low interest rates, and a greater appetite for growth sectors among these investors. Also found was that investors with a strategic focus on few specific sectors increasingly tend to acquire firms in other sectors, which implies an increase in growth-type acquisitions for investment opportunities. Finally, an empirical analysis of the financial leading indicators related to acquisitions revealed a direct correlation between acquisition activity and factors such as corporate size, which signifies access to acquisition financing and funding sources, as well as the proportion of debt, cash reserves, and the share of intangible assets representing innovation and value-adding capabilities.
The results of this report suggest the necessity to offer stronger access to acquisition financing to small-sized, innovative firms that have financial constraints but want to engage in acquisition deals. Towards that end, it is possible to consider financing via growth capital or matching investment. Also, further policy efforts are needed to facilitate IP financing and to enhance access to acquisition financing for the firms that have strength in intangible assets. Although highly likely to participate in acquisition deals, these firms can hardly access to external financing sources.
- Current State of Overseas CVC and its Implications for Holding Company CVCs [22-24]
- Senior Research Fellow Park, Yong Rin / Dec. 12, 2022
- The 2021 amendment to the Monopoly Regulation and Fair Trade Act has permitted Korea’s non-financial holding companies to establish Corporate Venture Capital (CVC). CVC firms established by non-financial holding companies are expected to contribute to the sound development and qualitative advancement of Korea’s startup ecosystem which has already achieved quantitative growth, as is the case with other economies. Notably, non-financial holding company CVC is subject to stricter regulations, considering Korea’s unique economic structure where economic power is heavily concentrated in large companies. Against this backdrop, the purpose and investment activities of CVC should be fully understood to ensure that CVC firms created by holding companies overcome the limitations of existing CVC created by non-holding companies and catalyze the development of Korea’s startup ecosystem.
Overseas CVC firms have been established for various purposes and have become major players in the startup ecosystem through collaboration with independent venture capital (VC), which are key factors behind their success. A quantitative analysis has found that in terms of the size of funding and investment, CVC is larger than independent VC. It also tends to engage in overseas investment and joint investment projects more frequently and exhibit better exit performance. In addition, overseas CVC has diversified into internal or external financing strategies and the selection of initial fundraising strategy depends on overall capital market conditions at the time of establishment.
Among regulations on non-financial holding company CVC, the duty of creating a wholly-owned subsidiary and the ban on the operation of non-investment financial businesses seem not to run counter to practices of overseas CVC. But there is room for easing external financing regulation to the extent that current regulation allowed as an exception to the separation of financial and industrial capital is enforced. Above all, the 40% ceiling on external financing by each fund, applicable to non-financial holding company CVC, should be revised to 40% of CVC’s total investment in funds with the aim of increasing autonomy in the composition of fund investors. What is needed over the medium term is thorough monitoring for developments in the startup investment ecosystem with regard to non-financial holding company CVC. In addition, competent authorities should gradually alleviate regulations by taking into account how the market reacts to such developments.
- Bonus Issues Turning into Thematic Stocks and Role of Informed Traders [22-21]
- Senior Research Fellow Nam, Gilnam / Nov. 01, 2022
- Since 2020, newly listed and loss-making companies in the pharmaceutical and biotech sectors have issued bonus shares in the name of the shareholder return policy. The prices of bonus shares have soared immediately after disclosure, which has overheated the bonus share market as is the case with the politically themed stocks. More recently, some listed companies that mainly contribute to turning bonus shares into thematic stocks have increased the number of new shares allocated to each shareholder to an unprecedented level in order to grab the attention of retail investors. As a result, the price of bonus shares and the turnover ratio tend to surge immediately after the disclosure and on the ex-rights date. However, this is a short-lived phenomenon that cannot enhance shareholder returns.
The response to bonus issues is sharply divided by type of investors, suggesting that retail investors and informed traders recognize the value of information regarding bonus issues differently. Retail investors show a massive net buying trend after bonus issues are disclosed, while institutional investors who act as informed traders consistently continue the net selling of bonus shares. Foreign investors tend to change their position over the course of stock trading to actively create more investing opportunities. In some cases, corporate insiders and early investors took advantage of bonus issue disclosure to sell their holdings. In the meantime, how informed traders react to bonus issue disclosure has been affected by regulatory changes in short selling. As the role of informed traders is limited by short-selling regulation, bonus shares show a larger price increase for a prolonged period.
If a company disguises a bonus issue as its shareholder return policy to attract retail investors, it could be tantamount to abusing the bonus issue system. Accordingly, specifying the purpose of bonus issues should be mandatory when a bonus issue is disclosed. If informed traders take on a greater role, the themed stock phenomenon where a share price keeps surging regardless of its intrinsic value could be curbed in the early stages. Hence, it is necessary not to excessively limit the role of informed traders when regulatory measures are devised.