Korea Inc. rushes to cut debt as interest rates surge

South Korean companies scrambled for lowering debts and borrowing costs with new financial and business strategies as interest rates on corporate loans hit the highest levels in more than seven years.

Local banks’ interest rates for new corporate lending rose to 3.84% per annum on average in June, the highest since February 2015, according to central bank data on Tuesday. That came as the Bank of Korea has been raising the policy interest rates since August 2021 to bring the rampant inflation under control.

Higher interest rates increased concerns over the financial burdens on companies with heavy debts. The debt ratio of T’way Air Co. stood at 7,349.9% as of the end of March on a consolidated basis, while the ratios of Lotte Tour Development Co., Asiana Airlines Inc. and CJ CGV Co. were at 2,967.8%, 2,811% and 1,942.7%, respectively, for example.

Borrowing costs of the country’s top 30 listed non-financial companies such as Samsung Electronics Co., LG Energy Solution Ltd., SK Hynix Inc., Hyundai Motor Co. and LG Chem Ltd. are expected to top 1 trillion won ($764.5 million) soon, given a surge in market interest rates during the second quarter, industry sources said. They spent 719.1 billion won in borrowing costs in the first quarter.

Rising interest rates forced companies to cut capital expenditures. Capex fell 1% in the second quarter from the previous three months, extending a spree of decline to a fourth straight quarter. Some companies looked for liquidity through asset sales and right offerings. A budget carrier Air Busan Co. with a debt ratio of 1,431.5% decided to issue stocks to raise 161.2 billion won next month.

Major companies with relatively small debts such as Hanwha Group, POSCO Holdings Inc., Korean Air Lines Co. and Korea Zinc Co. are preparing for further rises in interest rates through revising financial and business strategies.

According to the Financial Supervisory Service, 34 companies excluding special purpose acquisition companies (SPACs) have decided on business restructurings such as splits or mergers since last month as of Tuesday, more than double the 16 companies from a year earlier.

RESTRUCTURING, ASSET SALES

Hyundai Samho Heavy Industries Co., a subsidiary of Korea Shipbuilding & Offshore Engineering Co., plans to merge its transportation equipment manufacturing unit Hyundai Infra Solutions Co., which last year reported an operating loss of 28.7 billion won, in October. Hyundai Samho aims to cut losses through reorganizations of facilities and assets, as well as business restructuring.

Hanwha Group is integrating its defense affiliates to bolster the competitiveness in the sector and improve credit ratings and financial structures. Hanwha Aerospace Co. decided to acquire the defense business split off from Hanwha Corp. and merge a wholly-owned subsidiary Hanwha Defense Co.

Lotte Confectionery Co. merged Lotte Food Co. last month for similar purposes, while POSCO International seeks a merge with POSCO Energy Co.

Some companies raised money through sales of key assets to repay existing debts and improve financial structures.

POSCO Holdings and Dongkuk Steel Mill Co. are in talks with the world’s No. 2 steelmaker ArcelorMittal S.A. to sell their stakes in Brazil’s Companhia Siderurgica do Pecem steel mill, commonly known as CSP. POSCO Holdings and Dongkuk held 20% and 30% stakes in the Brazilian company, respectively.

Doosan Enerbility Co. sold its entire stake in a chemical subsidiary Doosan Mecatec Co. at 105 billion to a consortium of Bumhan Industries Co. and Metistone Equity Partners Co. Lotte Chemical Corp. is in negotiation to unload its entire 75% stake in Lotte Chemical Pakistan Ltd. to Novatex Ltd. in the South Asian country for an estimated price of up to 200 billion won.

FINANCIAL DERIVATIVES

Korean Air with debts exceeding 10 trillion won cut borrowing costs, utilizing financial derivatives such as currency swap (CRS), an agreement between the concerned two parties to exchange interest payments to the notional principal amount in different currencies over a specific period of time and to exchange the principal of two currencies agreed in the contract.

The country’s top airline reduced its net interest expense to 97.2 billion won on a separate basis in the first half from 240.2 billion won a year earlier.

It signed CRS deals with local and foreign banks to exchange its floating-rate loans in the dollar raised this year with fixed-rate loans in the won currency, reducing risks from higher interest rates and the weakness in the South Korean unit. The interest rates of the CRS deals were lower than the costs of the carrier’s bond sales in both the dollar and won.

Korea Zinc plans to raise 470 billion won by selling new shares to a Hanwha Group affiliate Hanwha H2 Energy USA Corp. on Aug. 18 in order to finance its plans to invest 10 trillion won in capex by 2030.

Write to Ik-Hwan Kim at lovepen@hankyung.com
Jongwoo Cheon edited this article.