[한은 보고서] Companies are living with government support… “If government money cuts, companies that lack liquidity will triple.”

Input 2020.12.24 11:00

As the new coronavirus infectious disease (Corona 19) crisis prolonged, corporate credit risk increased, but an analysis by the Bank of Korea that the government’s financial support has prevented the realization of the risk of insolvent. However, there are concerns that insolvency may become a reality, such as increasing the probability of corporate defaults if financial support is suspended in the future.

The BOK released the’Financial Stability Report for the Second Half of 2020′ on the 24th, and predicted that if the government’s financial support is completely terminated, the proportion of companies with insufficient liquidity next year will likely increase by nearly three times this year. It is expected that the delinquency rate of companies can also increase more than twice. The government’s financial support is preventing corporate credit risk.

This year’s corporate financial soundness has not deteriorated significantly compared to past crisis cases thanks to the government’s financial support. Compared to the past crisis cases, the decline in sales operating margin (-0.8%P) was smaller than during the foreign exchange crisis (-3.7%p) or the financial crisis (-2.7%p), and the interest compensation ratio (3.5x) was the foreign exchange crisis (1.0%). Times) or the financial crisis (3.1 times).

The interest compensation ratio is the value obtained by dividing the operating profit by the interest expense, and means whether the company has the ability to cover the interest expense with the profit earned from operating activities. If it is less than 1, it is classified as a potential insolvent company, and if it is less than 1 for 3 consecutive years, it is called a marginal company (zombie company). The debt-to-equity ratio (81.1%) was also good during the foreign exchange crisis (339.2%) or the financial crisis (109.8%).

Despite the crisis, it was thanks to the government’s financial support that the company’s financial soundness improved. However, the BOK predicted that if the government’s financial support is terminated in the future, the lack of liquidity or the delinquency rate will rise significantly. With this forecast, the BOK analyzed the positive situation in which corporate performance recovers (sales growth rate of 5.8%) and the pessimistic situation in which earnings improvement is delayed (sales growth rate of -1.7%) by scenario, along with financial support.

When the government extends financial support, the proportion of companies with insufficient liquidity in the basic situation is 2.5%, which is less than this year (3%), and it increases to 4.4% in pessimistic situations.

However, when financial support is completely terminated, the proportion of companies with insufficient liquidity in the basic situation increases to 5.1% in the basic situation and 7% in the pessimistic situation. The proportion of companies with insufficient liquidity is three times higher than this year. The BOK also estimates that the proportion of capital-encroaching companies will increase from 2.0% this year to 2.5-2.7% next year as the number of capital-encroaching companies increases, mainly from SMEs.

The BOK estimates that the probability of corporate default is 1.38% when sales recover, slightly lower than this year (1.41%), but will rise to 1.59% when sales decline. Accordingly, the delinquency rate is also estimated to rise from 0.47% this year to 0.60~0.80% when financial support is maintained and 1.05% to 1.25% when the support ends. If financial support is terminated, the delinquency rate will more than double. The BOK estimated the effect of the financial support policy, which was estimated based on the default probability, at 0.46%p, the difference between the expected delinquency rate this year (0.93%) and the actual delinquency rate (0.47%).

The BOK said, “The liquidity situation of companies will be greatly affected by the continuation of financial support during next year,” and “Even if corporate performance gradually recovers in the future, if the financial support measures are completely terminated, the liquidity situation worsens and the number of capital-encroaching companies increases. “There is a possibility that the accumulated credit risk will lead to corporate insolvency.”

“On the other hand, if easing financial support measures persist for a long time, there is a concern that corporate restructuring may be delayed and the efficient allocation of financial resources may be hindered. Therefore, future financial support measures will be gradually normalized in accordance with the financial soundness of the company, while the possibility of long-term survival. It is necessary to make selective support centered on these high-ranking companies.”