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2023 Oct/30
Analysis of High-Interest Debt in Listed Companies: Current State and Implications Issue Papers 23-21 PDF
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.